Reserve Bank of India governor Raghuram Rajan has warned state governments against debt-waiver schemes, as banks are already cash-strapped.
At a conference of state finance secretaries in Mumbai, Rajan said the debt waiver schemes announced by state governments adversely affect the financial condition of banks. He said such practices have resulted in an increase in the banking industry's capital requirements.
His statements came in the backdrop of states like Andhra Pradesh and its newly carved-out neighbour Telangana demanding Central aid to waive farm loans.
"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.
Rajan was addressing 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.
Andhra Pradesh and Telangana are seeking debt waiver to the tune of Rs1.3 lakh crore, citing damage inflicted by cyclone Phailin last year.
Rajan also referred to "the decline in financial savings and consequent challenges to debt management'' which is blocking economic growth.
The RBI governor also spoke of strengthening 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.
Rajan stressed on the challenges faced by the country last year in dealing with current account deficit, growth slowdown, fiscal consolidation and inflation management.
He also talked about the decline in savings and consequential challenges to debt management when growth and private sector credit would pick up.