The clean-up of non-banking finance companies (NBFCs) is needed as a priority, said former Reserve Bank of India (RBI) Governor Raghuram Rajan.
The recapitalisation of NBFCs is required, Rajan said in an interview with CNBC.
The financial system has an overhang on the economy, and the clean-up of banks and NBFCs must be accelerated, Rajan added.
The seeds of the non-performing assets (NPA) mess were sown in 2007-08, he said.
The former central bank governor spoke about India's economic condition, saying that India has witnessed a "substantial slowdown".
"Growth won't come from tinkering of rates. India needs new generation of reforms for economic growth," he said.
The Indian government has the required political strength and power to undertake reforms, Rajan noted.
Rajan also spoke about the US Federal Reserve's decision to cut rates by 25 basis points.
"The Fed has done enough to buy insurance against recession. The decision to pause is appropriate," he said.The Fed is influenced by political pressure, and it does not want rates that are too tight for the economy, Rajan added.