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Refrain from giving farm debt waivers: Rajan to states

Even as Andhra Pradesh and the newly-created Telangana continue with the demand of farm loan waivers, Reserve Bank Governor Raghuram Rajan on Monday asked the states to refrain from seeking such concessions.

‘Governor Rajan cautioned against debt waiver schemes announced by some states, pointing out their adverse impact on the financial health of banks, whose capital needs have gone up due to enhanced prudential requirements and deterioration in asset quality and the macro-economy in general,’ a release from the RBI said here.

Rajan on Monday addressed the chief secretaries from 15 states and finance secretaries of 27 states and nine Union Territories at the 27th conference of the state finance secretaries here. Andhra Pradesh and Telangana are seeking debt waiver to the tune of Rs 1.3 trillion citing damage inflicted by cyclone Phailin last year.

Rajan also referred to ‘the decline in financial savings and consequential challenges to debt management when growth and private sector credit would pick up’.

The governor also spoke about strengthening of the state level coordination committees by ensuring participation at higher levels and conducting frequent meetings.

‘State-level credit cooperative (SLCCs) should focus on financial inclusion for flow of public savings to the formal channels and protection of deposits of public mopped up by unauthorised and unscrupulous entities,’ Rajan said.  In the wake of unearthing of multiple unauthorised deposit raising schemes and scams such as Saradha and PACL, RBI Deputy Governor R Gandhi said the Reserve Bank is working with the government on redefining as to what constitutes a deposit.

‘We are working on redefining definition of deposits. The ‘deposits’, as it is defined today, is inadequate,’ he told reporters after a conference of chief secretaries and state finance secretaries here.

He said that in case of banks, the definition of a deposit is very clear, but it does not cover money collected by other entities for which the exercise is being carried out.

‘We are discussing it with states and the Centre. We need to define in such a way that who will be the regulator for different types of collection of money. Today, certain things are clear, certain things are unclear. So in the unclear area we are trying to bring more clarity,’ he said.

Gandhi said amendments will have to be made in the laws once the redefinition gets done.
Meanwhile, RBI Governor Raghuram Rajan said at the meeting that the central bank brass discussed strengthening the state- level coordination committees so that unauthorised deposit taking can be dealt with in a better way.

The comments from Gandhi come within days of capital markets regulator Sebi asking a PACL, Delhi-based property developer, to return Rs 49,100 crore to depositors, and after the busting of earlier scams like the one caused by the Saradha Group in West Bengal and two Sahara Group companies.

Certain entities, which are regulated by none of the financial sector watchdogs, have often taken advantage of the regulatory loopholes to raise large amount of deposits.

Rajan said a host of issues including state finances, their automation and liquidity issues were discussed at the meeting.

RBI Deputy Governor H R Khan said the newly revised norms on liquidity management, aimed at reducing the volatility in the overnight rates, will have a positive impact in terms of predictability and timing.

‘Basically, it (new liquidity framework) has been released. So just wait. In terms of predictability and timing, it should have positive impact,’ he said.
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