Former Reserve Bank of India Governor Y.V. Reddy said that the issue of non-performing assets, most of which are with public sector banks, needed more than just recapitalisation as a cure, and that the public sector banks were key to the modernisation of India’s financial sector.
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“The common thread between fiscal policy, monetary policy, and financial sector policy is public sector banks,” Mr. Reddy said while delivering the Sixth Dr. Raja Chelliah Memorial Lecture organised by the National Institute of Public Finance and Policy.
“The future of the financial system and indeed modernisation of the financial sector of India depends on how we overcome the intractable problem of the public sector banks.”
“There seems to be a political economy consensus for no change or minimal change,” Mr. Reddy added.
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The former RBI Governor and chairman of the 14th Finance Commission said that the effectiveness of monetary policy depended not only on the actions of the monetary authority but also on other related policies and the efficiency of transmitting institutions.
“With over 70% of the banks and overwhelming proportion of the financial sector in the public sector, there are issues of incentives and accountability and political interference,” Mr. Reddy said.
“The fact that the overwhelming proportion of the non-performing assets are with the public sector banks shows that the reform will have to go beyond simply recapitalising the banks.”
The former RBI governor added that a professional approach and a capacity to evaluate lending proposals could not be expected from public sector institutions that are bailed out from time to time with taxpayers’ money.