RBI board member Manish Sabharwal on Thursday praised the central bank on its proposal to merge Lakshmi Vilas Bank (LVB) with the Indian arm of Singapore-based DBS Bank, saying the scheme is a new template where a distressed private sector entity is rescued by another private player.

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On Tuesday, the government imposed a 30-day moratorium on Lakshmi Vilas Bank (LVB), restricting cash withdrawals at Rs 25,000 per depositor, and simultaneously announced a scheme to merge the cash-strapped lender with DBS Bank India.

The step was taken on the advice of the Reserve Bank of India (RBI) in view of the private sector lender's deteriorating financial health.

"RBI has done a remarkable job with the template that gets created...(in) the DBS and LVB deal. It's new template, where private distress is solved by private sector rescue. Shareholders get wiped out, depositors and others are fine," Sabharwal said.

He was speaking at a webinar organised by Centre for Financial Studies (CFS), Bhavan's SPJIMR.

Sabharwal, who is the chairman and co-founder of TeamLease Services, said the move indicates that the RBI is innovating.

He also said the country cannot have high non-performing assets (NPAs) for a longer period as they impact credit-to-GDP ratio.

"There is lot of capital which would recognise that Indian banking in next 30 years is a great opportunity. We have to create conditions to attract more equity capital into the banking system. I think a lot of progress is being made," he added.

Asked about the concerns of market participants on corporate governance issues at some lending institutions and the RBI's "late action" in any crisis, Sabharwal said the central bank is criticised simultaneously for acting too early and too late.

The RBI is learning to act earlier rather than later and one will see acceleration on that front, he added.

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"Yes, you can criticise the RBI in the past for being little slow at learning but I would submit, now, with experience of the last few years, with the progress they are making, that it is a remarkable institution in a country where many other public institutions have not developed the meritocracy and the competence that they have," Sabharwal emphasised.