Re-capitalise state banks for economic prosperity: Ruchir Sharma of Morgan Stanley

India needs to privatise and change the character of its state-owned banks which have massive level of bad loans that have become a drag on the economic growth, a leading financial expert said here today.

"These state banks are sitting on massive bad loans which were a big drag on the economic growth. It is one of the main reasons...that the (economic) growth is not picking up," said Ruchir Sharma, head of Emerging Markets at Morgan Stanley Investment Management (MSIS).

He called for privatisation of the state banks, given that non-performing loans were a main constrain to the economic growth.

The state banks control over 70% of the Indian banking sector, he said.

"One of the most important things the government, I think, needed to do was to privatise or at least change the character of these state banks," said Sharma.

"I don't think enough is being done on that. The bad loans were a problem and not a crisis situation. But it is a big choke hold on the economy," he said.

Comparatively, the private sector banks are doing well in the country.

Elaborating, Sharma said India needs a much larger plan to re-capitalise these banks with large size non-performing loans.

The disinvestment of 5% to 10% would not change the character of these state banks, he said.

The government should consider a much larger privatisation plan or foreign investment participation in these banks, with state stake holding of less than 51%, said Sharma after addressing the MSIS annual Global

Ideas conference being held here May 20-21, 2015.

The government usually maintains a controlling 51 per cent stake in state businesses when opening to private or foreign investors.