Former RBI governor Raghuram Rajan on Monday suggested the government to privatise select public sector banks, set up a bad bank to deal with NPAs and dilute the role of Department of Financial Services.

The reforms are necessary to ensure the growth of banking government without
the periodic boom-bust cycles, said a paper titled “Indian Banks: A Time to Reform?” co-authored by Rajan and former Reserve Bank deputy governor Viral Acharya.

“Re-privatisation of select PSBs can then be undertaken as part of a carefully calibrated strategy, bringing in private investors who have both financial expertise as well
as technological expertise; corporate houses must be kept from acquiring significant stakes, given their natural conflicts of interest,” the paper said.

Noting that the government obtains enormous power from directing bank lending, it said sometimes this power is exercised to advance public goals such as financial inclusion or infrastructure finance, sometimes it is used to offer patronage to, or exercise control over, industrialists.

“Winding down the department of financial services in the ministry of finance is essential, both as an affirmative signal of the intent to grant bank boards and management independence and as a commitment not to engage in “mission creep” when compulsions arise to use banks for serving costly social or political objectives,” the paper noted.