"No driver which results in credit and investment expansion is getting changed," he said in a report.
Garg also said that finance is more sophisticated and higher risk-taking economic activity than managing a real economy enterprise. The premise that banks can better finance investment and businesses in India under the public sector format is totally flawed, he said.
"After the banks were nationalised in 1969, they did not really fund investments for many decades. Actually, the banks essentially succeeded in mobilising deposits from people in what is described as CASA deposits which provided low cost resources to the banks. Such low cost deposits actually are a tax on ordinary people, he said in the report "Economic and Governance and Investment stimulating measures which needs to take to build 10 trillion dollar economy by early 2030".
On the lending side, despite several policy and regulatory interventions like priority sector lending etc, the expansion of credit has been relatively much smaller (in terms of credit to GDP ratio) as these public sector banks did not simply provide risk capital, he said. "In fact, these banks converted people's savings (which could have gone into risk capital as well) into debt to make India a high debt economy with low equity."
Garg said the consolidation in the banking sector will have no bearing on credit growth.
Against the backdrop of the government's "consolidation" of banks, he said: "Consolidation may bring some efficiency gains and cut costs to some extent. But, this will have no impact on the expansion of credit or banks becoming harbinger of investment promotion in the economy as no driver which results in credit and investment expansion is getting changed."
The former Finance Secretary also stressed the need to reform cooperative banks, which provide either crop credit or some agriculture equipment/investment credit and urban cooperative banks also.
Urban cooperative banks should either be re-organised as small finance banks with complete regulatory control of the RBI and no control of the state governments, or be merged in banks, or simply closed. The Regional Rural Banks should also be merged with their sponsor banks or one National Rural Bank can be created by merging all the RRBs (by transferring the stakes of the sponsoring banks to the Central government or to the holding company).
( With inputs from IANS )