Crisis-ridden YES Bank was put under a moratorium last week, with the RBI capping withdrawals at Rs 50,000 per account and superseding its board. SBI is set to pick up 49 per cent stake in the lender under RBI's reconstruction plan.
"YES Bank had given us enough notice that it has been in difficulty...so there was enough time to put together a plan. "I hope what we have got is best available (plan), but I don't want to second guess, because I don't know the details," Rajan said in an interview to CNBC-TV18.
Rajan, who completed his three-year term at the RBI in 2016, asserted that he has been saying for a long time now that there is a need to clean up the financial sector quickly and in a resolute way so that the country can move forward.
"Unwillingness to clean up has prolonged state of malaise in Indian economy...
"Clean up has to be undertaken on an emergency basis, otherwise sense of confidence which is needed in our NBFC, private banks and even in our state-owned banks that would be missing, that means financial sector cannot contribute to the growth," he said.
Rajan, a professor of finance at the University of Chicago Booth School of Business, also stressed on making the balance sheets of financial institutions as clean as possible, fixing governance issues and recapitalising banks. "So this is something we started in 2015, and it's 2020, 5 years is too long for it," he said.
To a question related to RBI's policy rate, Rajan said no amount of interest rate cut is going to help if credit growth is weak.
"Are companies willing to borrow and invest on the basis of lower interest rates... Unless we fix the financial system, it's like trying to send water through broken pipes. It's going to leak out all over the place," he said.
On when will India regain the economic growth rate of 6-7 per cent, Rajan said it will happen when the government takes appropriate action.