Former RBI governor Raghuram Rajan on Wednesday said the country has to clean up finance sector on an emergency basis, otherwise, it will hurt the economy as a whole.
In an interview to CNBC-TV18's Latha Venkatesh, Rajan said, "I think the unwillingness to take a direct action to clean up has prolonged the state of malaise in the Indian economy. We can keep saying things are getting back and then yet another sort of financial sector firm gets into trouble. Earlier, it was IL&FS, then it was Dewan Housing Finance Corporation, now it is Yes Bank."
The former RBI governor said the government has two ways to clean up the financial system, "First, make sure that the balance sheets are clean as possible and the balance sheets are recapitalised. Second, if there are governance issues, try and take a stronger step on ensuring that these firms are put on a better governance path."
However, Rajan said the task of cleaning the system has started in 2015. Now, it's 2020, so five years is too long for this.
Speaking on interest rates, Rajan said the interest rates are transmitted through the financial system through better credit decisions which are energising new investments and so on.
He added, "I think you have to look at it holistically rather than saying let us do another rate cut as we have room. The question is, are companies willing to borrow and invest on the basis of lower interest rates? We certainly are not at zero and therefore we have room. The question is, is the financial sector healthy enough to pass through these in terms of new credit growth, new lending.
Rajan, professor of Finance at University of Chicago Booth School of Business, said, "Unless we fix the health of the financial system, it is like trying to send water through a broken pipe, it is going to leak out all over the place and it is not going to reach the destination. You need to fix the pipe also not just try and send the water through."