RBI Governor Raghuram Rajan today said containing fiscal deficit is essential for achieving sustainable growth and underlined the need for developing a "good system" to deal with bad loans in banking sector.
"(Bank) deposits will not continue to be cheap, while the government cannot continue to pre-empt financing at the scale it has in the past if we are to have a modern entrepreneurial economy. This is yet another reason why fiscal discipline will be central to sustainable growth going forward," he said.
He was delivering the annual day lecture of Competition Commission of India (CCI) here.
Rajan stressed deposit financing will no longer be as cheap, as banks will have to compete with financial markets and real assets for the household's savings as households will be unwilling to leave a lot of money in low interest bearing accounts.
Referring to the rising bad loans or non-performing assets (NPAs) in the banking sector, he said "it does not go away. It gets worse. You need to recognise the problem quickly and deal with it".
The Governor further said: "It is too early to say we are at the end of the bad loan problem. My sense is if growth picks up, things will get much better. But this emphasises once more our need to get a good system to resolve distress, both in the corporate sector but also in the financial sector".
And for that, Rajan said government need operationalise company law tribunal. He said company bill is good with very strong bankruptcy code written into it.
Due to vigorous recovery efforts of the banks' NPA situation has improved in the final quarter of the last fiscal, as compared to the October-December period of 2013-2014.
Gross NPAs in January-March quarter in 2013-14 improved to 4.44 per cent from 5.07 per cent in the previous quarter.
Talking about mergers in the banking sector, he said "I think for sure we should be open to voluntary merger".
He further "when you go for forcing merger then there is a issue of culture...So we should be careful about forcing merger".
The Governor also said the RBI is committed to freeing entry in banking. The RBI recently announced two new commercial bank licenses after a "rigorous vetting" process.
"We are examining this experience, and after making appropriate changes, will announce a more regular process of giving licenses - what has been termed licenses on tap," he said.
