Mumbai: Reserve Bank of India governor Raghuram Rajan has cautioned finance secretaries of state governments against debt waiver schemes as banks are already starved of capital.
The warning came during a conference of the state finance secretaries, which was held in Mumbai on Monday. In the meeting, Rajan said that the debt waiver schemes announced by state governments have an adverse impact on the financial health of banks. He added that the banking sector's capital needs have gone up due to enhanced prudential requirements and rise in bad loans due to the slowdown in the economy.
Addressing the conference, the RBI governor highlighted the challenges faced by the country last year in tackling the serious issues relating to current account deficit (CAD), growth slowdown, fiscal consolidation and inflation management and steps taken to restore confidence in the macro economy of the country.
He referred to the decline in financial savings and consequential challenges to debt management when growth and private sector credit would pick up. Earlier, welcoming the participants, RBI deputy governor Harun Khan focused on channelizing financial savings with the formal financial system like bank deposits, equity, fixed income securities and insurance products for efficient financial intermediation.
He stressed that more concerted and coordinated measures would be needed by the state government along with the national regulators to prevent flow of peoples' savings into unauthorized, illegal and unviable schemes by dubious entities.
Chief Secretaries of 15 states and finance secretaries of 27 states and nine Union Territories participated in the conference. Besides Rajan, Sebi chairman U K Sinha also addressed the conference. Sinha said that recent changes in the Sebi Act enable it to control unauthorized deposit schemes. He sought cooperation of the state governments in this initiative.