The Reserve Bank of India 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. Governor Raghuram Rajan said this while addressing micro-financiers at a NABARD function in Mumbai today. 

Rajan said that the apex bank is also planning to revamp its cash management system so that the microfinance borrowers are protected from arbitrary loan pricing. Reiterating his reservation against repeated loan waivers by various state governments, he said the move distorts credit pricing, thereby also disrupting the credit market. There should be a reasonable ceiling on interest rate on loans from micro finance lenders for consumer protection.

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.