"The current stress on banking system is a reflection possibly of several factors. First, easy post-crisis macro and regulatory policies since 2009; second, the delayed recognition of the problem both by banks and the regulator; third, the impact of slow-down in growth of GDP; and fourth, the arguable factor is high credit growth in 2004-06 despite high interest rates and regulatory counter-cyclical measure," Y V Reddy said.
The most striking aspect of the current situation is the large divergence between the bank's classification and subsequent classification by RBI on a detailed scrutiny, he pointed out.
The first step for improving our banking system, according to Reddy, would be a commitment to reduce SLR and CRR to global levels as soon as possible as banks are overburdened with police induced obligations.
He also raised concern over the large presence of foreign share-holding in banks, particularly in the private sector banks. "The current policy of ownership and governance in banking needs to be reviewed urgently before our banking system passes on to foreign owners, irrevocably,"he added.
Reddy, who also headed the Fourteenth Commission, reminded that the commission had made several recommendations to improve the health of Indian banking and financial system and it was time the Government made its stand clear on those recommendations.
"In view of the large amounts of public money involved, the government may put in public domain action taken on Fourteenth Finance
Commission's recommendation for improving the financial system with economical use of tax payer's money," Reddy said in reference to the recent bank recapitalisation among other things
Among other suggestions, the commission had recommended that a financial sector public enterprises committee be appointed to examine and recommend parameters for appropriate future fiscal support to financial sector public enterprises.
Former RBI Governor also wanted the Government to place a White Paper on the future of Public Sector banking in Parliament as soon as possible in view of their criticality for efficiency in financial sector as a whole, and to be able to serve a globally competitive economy.