RBI to invite small and payment bank applications by month-end

Reserve Bank of India (RBI) will invite applications for setting up of small and payment banks - aimed to cater to small businesses and low income households - by the end of this month after putting in place final norms in this regard.

Besides, Reserve Bank is also planning to revamp its cash management system, Governor Raghuram Rajan said on Thursday.

Addressing micro-financiers at a Nabard function in Mumbai, Rajan also said that microfinance borrowers should be protected from arbitrary loan pricing.

The RBI Governor also reiterated his reservation against repeated loan waivers by various state governments, saying the move distorts credit pricing, thereby also disrupting the credit market.

"There should be a reasonable ceiling on interest rate on loans from microfinance lenders for consumer protection," he said.

Following the October 2010 crisis in the then undivided Andhra Pradesh that crippled the MFI sector, an RBI-appointed Malegam panel had suggested 26 per cent monthly cap on interest rates for the sector. This cap was notified by the central bank in April 2012.

The Andhra Pradesh crisis began after the state government banned recovery by any coercive means, following a string of alleged suicides by micro-credit borrowers.

Both Andhra Pradesh and Telangana governments have declared loan waivers for the farmers hit by cyclone Phailin last year.

While the Telangana government has given the mandated 25 per cent of the written off loan amount to the banks, Andhra Pradesh has not done it so far.

Banks have over Rs 1.3 trillion exposure to the farm sector in these two states.