Delivering a special address at the Indian Banking Conference organised by the Indian School of Business in Hyderabad on Friday, he said the loan waiver was not the way to go in the future. It would amount to penalising the people, who make an attempt to repay loans.
Such populist measures would be detrimental to the economy in the long term. Giving subsidies directly to the households was a better option than extending across-the-board subsidies, he said, adding this would be possible once the proposal to introduce a national identity number with a biometric element took shape.
The identity number could be used for sharing credit history to ensure access to new credit for the beneficiaries. Liberal use of banking correspondents and allowing small finance banks would be an effective method for bringing in financial inclusion, he added.
Emphasising the need for improving credit recovery, Rajan said the government should legislate a modern bankruptcy code. He wanted extension of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (Sarfaesi) to all institutional lenders.
Talking about the macro-economic framework, he said the Reserve Bank of India (RBI) should focus on controlling inflation instead of having multiple "irreconcilable mandates". "Don't expect RBI to do magic," he said, adding it was better for the apex bank to focus on doing one thing well rather than on many things.
With regard to public sector banks, Rajan said there was a need to create stronger boards that had "teeth". "Why not privatise one or two public sector banks and see what happens," he asked.
