During Rajan's tenure "loans were given just based on phone calls from crony leaders and public sector banks in India till today are depending on government equity infusion to get out of that mire," she said on Tuesday during a lecture at Columbia University.
Sitharaman said: "Indian public sector banks did not have a worst phase than when (there was) the combination of Dr Manmohan Singh and Dr Raghuram Rajan, as the Prime Minister and the Governor of the Reserve Bank."
She was responding to an audience members question about Rajan's reported criticism that Prime Minister Narendra Modi's government is "extremely centralised" and does not have a "consistent and articulated vision" for economic growth.
Lashing out at Rajan, Sitharaman said, "Rather too democratic leadership, which probably will have the approval quite a lot of liberals, I am afraid left behind such a nasty stink of corruption which we are cleaning up even today."
"So, if there is a feeling that there has been a centralised leadership now, I like to say that a very democratised leadership led to a whole lot of corruption," she said.
She added, "You need to have a country as diverse as India with an effective leadership".
Her lecture was hosted by the Columbia University's Deepak and Neera Raj Center on Indian Economic Policies.
With eminent Columbia University economists, Jagdish Bhagwati and former NITI Aayog Vice Chairman Aravind Panagaria, in the audience, Sitharaman asked, "Can all of us put together also think of asking what ails our banks today? Where has it been inherited from?"
She said she wanted "answers for the time when Dr Raghuram Rajan was here in the Governor's post".
She said, "The Indian banks, for which today to give a lifeline is the primary duty of the finance minister of India. And the lifeline kind of an emergency is not come overnight."
Rajan is now a distinguished professor of finance at University of Chicago Booth School of Business. left a message with the school staff asking for his response to Sitharaman's allegations.
While delivering the O.P. Jindal Lecture recently at Brown University recently, Rajan had reportedly said, "This government is extremely centralised which puts a lot of pressure on the leadership. The leadership doesn't have a consistent and articulated vision on how to achieve economic growth."
Sitharaman said to laughter from the audience, "I am sure Dr Raghuram Rajan will agree that Dr Manmohan Singh would have had a consistent articulated vision for India."
Expressing concern over the Indian economy's slowdown, Rajan had reportedly said that the "sequence of demonetisation and GST (Goods and Services Tax) was essentially the straw that seems to have broken the Indian economy's back because it came at a point when the Indian economy was relatively weak,"
Rajan had also said India has "become too big an economy to be run from the top. And unfortunately the experience so far is that it simply doesn't work."
Sitharaman dismissed criticism by Economics Nobel Laureate Abhijit Banerjee on Monday that the government should be focused on boosting demand rather than on monetary stability.
She said that this was precisely what the government was doing by making credit available through the banks and other institutions and through a massive investment in government infrastructure projects.
She said, "In the budget itself in July, 'we announced 100 lakh crore of Indian rupee for the next five years for building public infrastructure, government spending on infrastructure, which means it is going to boost consumption. Money in the hands of people, wherever the projects are on.
And for that we have even formed a task force which will help me frontload a large part of this money and not waiting for it to be spent over four or five years."
(Arul Louis can be contacted at arul.l@.in and followed on Twitter @arulouis)
( With inputs from IANS )