RBI: Banks needs to review categories under priority sector lending

The banking sector needs to question the categories under priority sector lending, according to RBI Governor Raghuram Rajan.

"Select special sectors need ease of credit ... the biggest need for agriculture is long-term money while farmers don't get long-term loans because short-term loans are subsidised," Rajan said at a banking conference organised by FICCI.

He said bankers need to "ask if students studying abroad are more needy?"

Interest subventions and loan waiver schemes can distort prices and lead to unhealthy borrowing practices, Rajan said while addressing the bankers.

He said loan waivers, as proposed by the Andhra Pradesh Chief Minister, were not healthy for the banking system and could distort prices and the credit culture.

Further, he said the Pradhan Mantri Jan Dhan Yojna was an internal priority and that direct benefit transfers would reduce leakage and limit distortion of prices.

He also cautioned banks on duplication of accounts opened and asked them to ensure that the newly opened accounts work and make the scheme more effective.

The priority sector lending requirement currently is at a minimum of 40 per cent, including sectors such as agriculture, education, rural housing, micro and small sector enterprises, among others.

Rate reduction

Prices of not just food but also other items needs to come down to reduce interest rates, according to him.

"Inflation is high not only in food but also in non-food items and the best solution for the country is to bring it down. Then I can cut interest rates," Rajan said at the digital banking conclave.

On being asked if he would cut rates, he said, "I have no desire to keep interest rates high for even a second longer. I want to bring down interest rates when it is feasible and that would be when we have won the fight against inflation.

"There is no point in cutting interest rates to see inflation pick up again," Rajan said, adding inflation is moving in the direction proposed by the RBI.

The RBI is targeting retail inflation of 8 per cent by January next year and 6 per cent by January 2016.

Taking a dig at industry for its persistent demand for cutting lending rates despite rising prices, the Governor asked them to bring down prices and was confident they wouldn’t reach a consensus on this.

"When you do that then we will do that, we have no problem. Clearly, you will have no consensus on this," he said.

Wholesale price inflation for August declined sharply to a near five-year low of 3.74 per cent on declining prices of vegetables and other food articles from 5.19 per cent in July and 6.99 per cent in August 2013.

However, consumer price inflation, which the RBI has adopted as a monetary policy gauge, still remains high. For August, it had inched down marginally to 7.8 per cent from 7.96 per cent a month earlier.

Internal evaluation of lending processes

Recent scandals underlined the need for better internal evaluation of lending processes. Banking must become more engaged and informed, he said.

Rajan reiterated the call for more operational freedom for State-run banks.

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