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Banking on banks

Indeed, there is scope for vast improvement on several fronts, as Rajan and Acharya see it, from the performance of state-run banks and the way they handle dud loans to the risk- management systems they use and the uniformity of their structures

Sometimes, it takes a crisis to do what’s needed and India’s current turmoil offers one such opportunity. Former Reserve Bank of India governor Raghuram Rajan and former deputy governor Viral Acharya, in a co-authored paper, have pointed out how the enormous strain on India’s fiscal resources makes it imperative that our banking system is put through the wringer of reforms. Without these, it will act as a drag on growth rather than an engine.

Indeed, there is scope for vast improvement on several fronts, as Rajan and Acharya see it, from the performance of state-run banks and the way they handle dud loans to the risk- management systems they use and the uniformity of their structures. They offer a set of suggestions that could serve as touch points in determining the broad direction of our banking policy. Financial intermediation in India has been hamstrung for too long by state directives that often go against efficiency without achieving their stated aims. With the covid crisis exposing this state-dominated sector’s frailties, it’s time for corrective action. Without good banks, resource allocation in the country will continue to be suboptimal.

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