The Washington-based Institute of International Finance on Thursday said that Indian government should reduce its role in banking system and further liberalise policies to attract more foreign direct investment.

The country's economic reform programme is on track. Yet, there is scope to improve working of the system. The government has to reduce its role in the banking sector, IIF managing director, Charles Dallara said.

There is a need to encourage partnership between foreign banks and Indian banking entities and also other players in this sector, he said.

The legacy of licensing and bureaucracy was thick and businessmen still feel difficult to deal with a government set up, he added. However, the encouraging aspect of India's economy is that it is growing with a robust private sector, Dallara said.

On regulations relating to FDI, he said the current set of restrictions should be reviewed and liberalised further. The government should be confident that more jobs would be created by allowing FDI in more sectors, he added.