Former RBI governor Raghuram Rajan on Monday, September 21, advised the government to privatize select public sector banks, set up a ‘Bad Bank’ to deal with NPAs, and dilute the role of the Department of Financial Services.

The reforms are necessary to ensure the growth of the banking government without the periodic boom-bust cycles, said a paper titled ‘Indian Banks: A Time to Reform?’ ; co-authored by Rajan and Viral Acharya, Former Reserve Bank Deputy Governor. “Re-privatization 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.

It also argued that state-linked banks can be a first step in altering the ownership structure of some public sector banks (PSBs), where the government brings down its stakes to below 50 percent, creating distance from operations of banks, and improving governance along the way.

On bank license norms, the paper pitched for on-tap licensing of banks to be kept open at all times. The paper also stressed on the need of allowing PSBs to recruit laterally while retaining the talent they have.