×

Narendra Modi pledges India banking shake-up

Kevin Frayer | Getty Images

Narendra Modi, India's prime minister, has moved to address worries about his flagging economic reform agenda with a pledge to shake-up India's banking sector and the likely appointment of market-friendly economist Arvind Panagariya to head a government think-tank.

Mr Modi endured a frustrating end to 2014 as parliamentary deadlock stymied major legislation, prompting his administration to pass temporary ordinances in areas such as helping businesses to purchase land for development projects.

To regain momentum, Mr Modi this weekend pledged to give greater independence to struggling public sector lenders, while tempting global investors to participate in plans to raise Rs1.6 trillion ($26 billion) by selling down government bank stakes.

Speaking at a summit of the heads of all of India's public sector financial institutions, Mr Modi promised to end the country's heritage of "lazy banking", a term often used to criticize risk-averse lenders.

Addressing concerns that banks face political pressure to give loans to favoredcompanies, Mr Modi said lenders "would be run professionally" in future, and promised "no interference" from New Delhi.

Jayant Sinha, minister of state for finance, said that the moves were "a very important step" to repair the banking sector, which must raise an estimated $50 billion to meet new capital rules over the next four years while also reversing recent increases in bad loans.

"To bring everyone together at this event, and to ask all of India's banking system to look seriously at bold structural reforms, is an unprecedented move," Mr Sinha said.

Read MoreIndia: fairest emerging market of them all?

India is now likely to bring forward measures to increase the autonomy of bank boards, ensure the independence of senior appointments, and introduce market-linked pay for bank executives.

The banking reforms come in advance of the likely appointment this week of Mr Panagariya, a widely respected and liberally-minded economist, to lead the government think-tank set up to replace India's Soviet-era planning commission.

In August, Mr Modi scrapped the planning commission, which had guided India's economic development for six decades through the publication of weighty five-year plans. He accused the body of excessive centralization, obstructing the plans of state-level governments.

More from The Financial Times:

Doubt cast on Modi's hunt for black money
Economists sceptical ECB bond-buying would revive eurozone
New restaurant trends for 2015

Mr Modi will officially chair the replacement — to be called the NITI Aayog, or National Institution for Transforming India — but two people familiar with the matter confirmed that Mr Panagariya had accepted the position as vice-chairman, making him its operational head.

A former Asian Development Bank chief economist, Mr Panagariya has been a trenchant advocates for radical economic changes in India, calling repeatedly for the scrapping of outdated labor regulations and the privatization of inefficient state-owned industries.

Although a supporter of Mr Modi, he has also been critical of the pace of India's reform agenda. In a recent article, Mr Panagariya described the prime minister's first budget as "somewhat disappointing" and called for greater "entrepreneur-friendly reforms in areas of labour, land, higher education and infrastructure".

Arun Maira, a management consultant and former planning commission member, described the appointment as a "positive step", but said more details were needed on the operation of the proposed NITI body.

"We need to be sure it can deliver these major planning processes, rather than just getting in people who are sitting in their pinnacles and ivory towers, setting goals with no connection to the delivery of policy," Mr Maira said.

A government spokesman declined to comment on the appointment, while Mr Panagariya could not be reached for comment.