He also favoured channelising "full savings" of the households into the financial system so that requisite resources for growth are made available.
"In the short term (up to 12 months) there is need to clean up the NPAs and then restructure other stressed loans so as to put the economy back on the track," Rajan said at the two-day Gyan Sangam here.
Total Gross Non Performing Assets of public sector banks stood at over Rs 2.43 lakh crore as on end-September 2014. The top 30 NPAs account for Rs 87,368 crore or 35.9 percent of total gross NPAs of PSBs.
Rajan said the bona fide mistakes made by the bankers while taking commercial decisions should be protected by the government.
"If the officers are hauled up for such decisions this would to lead to delay in good decisions because of avoidance of risk," he said.
The governor also stated that there was a need for internationalisation of the banking system in the current global environment.
"The Capital base of the banks may need to be enhanced," Rajan said while emphasising on the need for consolidation in ownership, improvement in governance, and enhancement of management capability.
With the licensing of the small banks and the payment banks, there would be new players in the industry and competition amongst the PSBs will also grow to meet these challenges.
"Accordingly, PSBs have to develop differentiated products," Rajan said.

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