Switching to Old Pension Scheme Could Create Obligations for Future: Raghuram Rajan

Former RBI Governor Raghuram Rajan claimed that while some state governments have shown a desire to switch to the old pension scheme, doing so could result in the creation of obligations for the future.

In a conversation with an online portal in Davos, Rajan said that the former pension plan's massive liabilities happen to be the reason it was replaced.

He added that because liabilities are not recognized, defined benefit plans are simpler for governments to embrace. Additionally, he warned banks against favoring retail loans too heavily.

A number of state governments, including those of Rajasthan, Chhattisgarh, and Punjab, have said they will go to the old pension system, and Himachal Pradesh has also stated its desire to do so.

Rajan went on to say that while it is up to each state government to decide, these programmes should be specifically targeted at the most vulnerable members of society in order to help them.

The former RBI Governor also issued a warning to Indian banks during the interview over their move toward retail lending, noting that there may be hazards in case of a downturn.

Rajan's remarks have been made at a time when retail assets in Indian banks have increased significantly relative to wholesale loans.

The latter suggested that banks should examine all risks before engaging in infrastructure funding.

According to the former banker, the RBI went toward infrastructure loans between 2007 and 2009, but later they caused issues.

Meanwhile, Himachal Pradesh has already implemented the Old Pension Scheme and stopped using the National Pension System (NPS).

A government employee receives his or her complete pension payment following their retirement under the Old Pension Scheme, while during employment time, the pension amount is not withdrawn from the employee's pay.

In 2004, the NDA administration ended the Old Pension Scheme. The National Pension System was then introduced by the Atal Bihari Vajpayee administration.