start cleaning up? why not let growth take care of the problem? as i have already said, the process started in april 2015. we knew at that time that the global economy would continue to be weak but not that markets would be in turmoil today. nevertheless, this simply reinforces our belief that we needed to act when we did. while growth will help the system, it would likely be significantly impaired if we did not nudge the process of clean up. non - food credit growth from public sector banks, the more stressed part of the system, grew at only 6. 6 % over the calendar year 2015. industrial credit growth for psbs was only 3. 3 % while growth in lending to agriculture and allied lending was only 10. 4 %. the only area of strength was personal loans, where growth was 16. 9 %. in contrast, non - food credit growth in private sector banks was 20. 2 %, in agriculture 25. 4 %, in industry 14. 6 %, and 23. 5 % in personal loans. put differently, in each of these areas except personal loans, loan growth in private sector banks was at least 10 percentage points higher than public sector banks, while loan growth in personal loans was 6. 6 percentage points higher. the most plausible explanation i have is that the stressed balance sheet of public sector banks is occupying management attention and holding them back, and the only way for them to supply the economy ’ s need for credit, which is essential for higher economic growth, is to clean up. the silver lining message in the slower credit growth is that banks have not been lending indiscriminately in an attempt to reduce the size of stressed assets in an expanded overall balance sheet, and this bodes well for future slippages. in sum, to the question of what comes first, clean up or growth, i think the answer is unambiguously “ clean up! ” indeed, this is the lesson from every other country that has faced financial stress. some citizens are outraged by the size of the losses that will have to eventually be absorbed and want the perpetrators to be brought to justice. let me emphasize that all npas are not because of malfeasance. indeed, most are not. loans can go bad even if the promoter has the best intent and banks do the fullest due diligence before sanctioning. nevertheless, where there is evidence of malfeasance by the promoter, it is extremely important that

to be fair to the sector, some of the events were external & hence, not in control of the bank management. but the important lesson is unambiguous : “ in absence of strong structural and governance reforms, consistency of the performance would always remain susceptible to such events ” such reforms in private incentives / compensations sector banks have to be focussed on misaligned agenda for psbs is much larger, however, the immediate and overriding priority is to complete the clean - up of the banks ’ balance sheets which is underway resultant provisioning needs coupled with meeting basel iii norms / migration to ifrs & to capture due market share in growth funding would entail recapitalisation of most of these banks. seeking this capital externally at this stage may be difficult as also value eroding for the majority owner. simultaneously process has to continue to bestow greater “ governance autonomy ” to these banks. my sense is that the government ownership of these banks has resulted in crucial stability and resilience in trying times. immediate roadmap should, therefore, be towards complete “ managerial autonomy ”. if government remains the largest shareholder, not necessarily majority shareholder, it still serves the intended purpose. at the same time, it releases these banks from multi - institutional oversights and overlapping controls. bis central bankers ’ speeches hr autonomy would naturally flow from the above. banks would be able to move towards competitive compensation, flexible hiring and move away from the “ collective bargaining ” - just to quote a few from many possible outcomes. there could be a reasonable apprehension that such measures can adversely impact the objectives of inclusive growth being attempted through several national missions and schemes. i would argue that advent of several new institutions ( as recently licensed by rbi ), new processes, digital advancements & competition would ensure that these objectives are well supported. similarly, some of the reforms are driven by a global reform structure. these pertain to capital, liquidity and disclosure standards under the basel iii package. some such other measures are tlac, sibs, misconduct rules, etc. few other measures are currently under discussion, such as, imposing risk weight on sovereign exposure and new standardised approach for credit and operational risk. having dealt with the framework of macro reforms, let me now briefly touch upon nuts and bolts of the reform process. governance in banks • some action already taken - setting up of bbb, post of cmd split into a non - executive chairman and a ceo, selection process made more objective