The swadeshi ideologue also favoured monetisation of deficit by the Reserve Bank saying it was a better option than overseas funds.
The banks got into trouble by overlending money during 2004-2009 and now they are getting the economy into trouble by not lending money, he said, attributing the problem to wrong prudential norms.
In a webinar on 'Rebuilding Indian Economy: Challenges and Opportunities' organised by Bharat Prakashan Delhi, Gurumurthy said further said that out of Rs 11 lakh crore of deposits, the banks have deployed as much as Rs 6 lakh crore in Reserve Bank of India (RBI).
"The banks got in trouble by overlending money in 2004 to 2009 and they are getting into trouble by not lending the money. When economy needs the money; bank has money; bank does not lend the money because of the wrong prudential norms we are following," Gurumurthy said.
He pointed out that 80 per cent of borrowers have been disqualified to borrow and the banks are unable to lend.
"I think the RBI and the government should (sit) together and work out a model by which all the people who have been declared as NPA, provided their companies, their businesses are viable, they should be having one-time restructuring plan without which the way we want to come out of COVID-19, we will not be able to out easily".
Gurumurthy further said the world is going on a protective mode in the wake of the COVID-19 shock.
"I am happy that some people like Dr C Rangarajan (former RBI Governor) and others are now saying that we should monetise our deficit. This is very important because the nation standing on its own strength will create money to manage its issues rather than expecting some money will come from outside to pay this out," he said.
Recently, former RBI Governor Raghuram Rajan also had suggested that the government should go in for monetisation and higher fiscal deficit in a 'measured' way to protect the health of the economy in these abnormal times.
Monetisation, which is loosely referred to the printing of currency by the Reserve Bank, need not be a constraint on government spending, Rajan had said in a blog, adding, "government should be concerned about protecting the health of the economy and should spend what is needed."
The government is trying to garner resources to combat the impact of coronavirus on the economy and the Finance Ministry on Friday decided to raise the market borrowing programme by 54 per cent to Rs 12 lakh crore for 2020-21, up from Rs 7.8 lakh crore estimated in February. BKS NKD CS MRMR