Former Reserve Bank of India(RBI) Governor Y Venugopal Reddy on Thursday suggested that a high level internal inquiry within the RBI
should be undertaken to fix the responsibility for excesses in non-performing assets (NPAs) in recent years and, more important, to suggest and adopt measures to improve the system as a whole.
Delivering a lecture on the topic, 'State of Banking in India', Reddy, who was Governor of the Indian Central Bank between 2003 and 2008, said that the steep rise in NPAs in public sector banks
was more to do with their governance rather than a systemic problem.
Besides calling for an internal inquiry on the NPAs, he also suggested a range of steps, including the lowering of policy induced obligations, to create a globally competitive banking system in the country.
"The current stress on banking system is a reflection possibly of several factors. First, easy post-crisis macro and regulatory policies since 2009; second, the delayed recognition of the problem both by banks and the regulator; third, the impact of slow-down in growth of GDP; and fourth, the arguable factor is high credit growth
in 2004-06 despite high interest rates and regulatory counter-cyclical measure," Y V Reddy said.
The most striking aspect of the current situation is the large divergence between the bank's classification and subsequent classification by RBI
on a detailed scrutiny, he pointed out.
The first step for improving our banking system, according to Reddy, would be a commitment to reduce SLR and CRR to global levels as soon as possible as banks are overburdened with police induced obligations.
He also raised concern over the large presence of foreign share-holding in banks, particularly in the private sector banks. "The current policy of ownership and governance in banking needs to be reviewed urgently before our banking system passes on to foreign owners, irrevocably,"he added.
Reddy, who also headed the Fourteenth Commission, reminded that the commission had made several recommendations to improve the health of Indian banking and financial system and it was time the Government made its stand clear on those recommendations.
"In view of the large amounts of public money involved, the government may put in public domain action taken on Fourteenth Finance Commission's recommendation for improving the financial system with economical use of tax payer's money," Reddy said in reference to the recent bank recapitalisation among other things
Among other suggestions, the commission had recommended that a financial sector public enterprises committee be appointed to examine and recommend parameters for appropriate future fiscal support to financial sector public enterprises.
Governor also wanted the Government to place a White Paper on the future of Public Sector banking in Parliament as soon as possible in view of their criticality for efficiency in financial sector as a whole, and to be able to serve a globally competitive economy.