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Economy

RBI Wants To Cut Sector-Based Incentives When Banks Give Loans

My last point on the Rajan’s recent presentation is about how they view financial inclusion in the concept of spreading Credit.image

Does this probably indicate:

  • RBI will do away with the concept of a "priority sector" which banks must lend to? (40% of all loans)
  • RBI cutting through the concept of interest rate subventions where someone else pays a portion of the interest (usually the government?)
  • RBI will demand that the government please not waive loans by ponying up the money?
  • Even better, removing the lower risk weight for loans in certain sectors like housing? Come on, we need this housing bubble to burst.

A problem in credit today is that these "schemes" are underutilized by those who really need it, and overutilized by those who don’t. A farmer that can pay back a loan does not because he expects a waiver. A student who deserves a loan struggles due to lack of a "guarantor", but those who don’t need the money but would like a loan at a lower rate get themselves education loans.

I’d like to see the RBI and the government reduce such sectoral credit focus, and to keep things more even.

Okay, I’ll stop about the RBI.