He said by controlling the banking system, the government of India is having access to extra budgetary resources or unaccountable resources to penetrate into the policies which it could not otherwise do.
Speaking at the Indian School of Business (ISB) here, Reddy said since the Union government had no developmental staff in the states, banks were used to penetrate into their jurisdiction.
He attributed the problem of Indian banking industry to the dual control by the Central government and the RBI.
“Recently, we had Urjit Patel (RBI Governor) as saying that regulation should be ownership-neutral. He says I don’t have regulatory powers but the government says RBI has enough regulatory powers. What is the truth? The truth is the problem of dual control,” he said.
Reddy said the Narasimhan committee recommended that dual control should be done away with, but it has not ended to date.
He identified political economy as another problem and pointed out that unlike in the past, there are many MPs who are businessmen and many businessmen who are MPs with the public sector banks providing the link.
He was delivering key note address at “Artha 2018”, ISB’s annual financial conclave.
Reddy believes that solution for problem in agriculture lies outside agriculture as the sector faces policy-induced risks and a host of uncertainties.
“Will you put more money in expanding industry or contracting industry?” he asked the students while pointing out that agriculture accounts for 15-16 per cent of the GDP and it is likely to further come down.
Reddy said he was an unwilling party to the biggest farm loan waiver in the country. He was referring to loan waiver by the UPA government in 2008 when he was the RBI Governor.
He believes that farm loan waiver by the Centre is bigger evil than loan waiver by states. “All farmers all over the country can’t be distressed,” he remarked.
“If Industry doesn’t repay, you are a wilful defaulter and you are a criminal. If agriculture doesn’t pay you are a distressed farmer. We are not able to define who is a distressed farmer. Distressed farmer is not somebody who is able to get money from bank and certainly not the one who can’t afford to repay,” he said claiming that only 10 per cent of the farmers get bank loans.
On financial inclusion, he said it was different from economic, social and political inclusion. “We talk as though financial inclusion is going to abolish poverty in India. Financial inclusion is only for those who have finance and if they are not included they will be included,” he added.