This problem became so serious that the US regulatory agencies announced in 1993 the Additional Availability Initiative Programme designed for the encouragement of lending to small businesses. It reversed the original decision of the regulatory authorities to encourage the improvement of quality of US bank balance sheets. After the advent of the Basle Accord the Japanese banks cut down heavily oninternational lending for some time as they were under capitalised.

The Narasimham Committee has to do a tight rope walk between prudential requirements and encouragement for lending for growth. Prudential and monetary regulation are often thought of as two separate areas. Suggestions have been made both in USA and the European Community for a separate regulatory authority independent of the central bank. If one looks at the matter closely the borderlines between the two are rather thin. The CRR, which is an important weapon in the arsenal of most of the central banks in the world despite the increasing importance of open market operations, was originally conceived of a prudential measure by bankers right from the days of the goldsmiths who were the forerunners of modern banks.

A certain proportion of the deposits was kept in reserve to meet requests for withdrawals. This proportion was determined based on past experience and seasonal needs. In course of time, with the development of the depositmultiplier theory, central banks found a powerful weapon in CRR for regulating money supply. Thus what was originally a prudential measure voluntarily observed by banks became a monetary instrument in the hands of the central banks.

The capital adequacy ratio has been conceived of as a prudential measure. But it also constraints the expansion of credit since additional credit needs the backing of additional capital. This in turn regulates money supply. Many observers have noted that one of the factors contributing to the slow growth of money supply in the European Community in recent years is the adoption of the Basle Standards on capital adequacy.

In the Indian context also some experts have said that the regulatory authority should be independent of the central bank. The Reserve Bank of India (RBI) is the custodian of the financial system. It is inconveivable to think of depriving it of its supervisory role. Giving testimoney before the Senate Committee on Banking, Housing and Urban Affairs (March 2,1994) Alan Greenspan, chairman of the Federal Reserve System, said that the proposal of a single regulator in USA would mean that it would be disconnected from broader economic policy issues. A regulator without macro-economic responsibility is likely to inhibit prudent risk-taking by banks. He emphasised that there existed a significant policy trade-off. "On the one hand, regulators are concerned about bank failures and their effects on the economy as well as their cost to the insurance fund. On the other hand,s banks need to take risk to finance growth."

Considering the size of the banking system in the country, which is arguably the largest in the world, there is a great need for strengthening the supervision machinery in the RBI. If one takes into account the total volume of bank credit and its annual growth rate along with the number of scams and the volume of funds involved there is a case for setting up inspection teams in each district headquarters in the country. This may look somewhat atrociousbut a good cost-benefit calculation would show it to be not so.

The total amount of money which has gone down the drain due to bad loans, financial scams etc., since independence mays amount to more than Rs 500 billion. The cost could be minimised by having small inspection teams. While some of the staff could be diverted from other departments of RBI which are increasingly becoming irrelevant in the era of liberalisation others may have to be recruited. The idea of establishing such terams should be to prevent scams through more frequent inspection rather than discover them after they happen. Statistical methods are available and have been employed in the Western countries to identify and isolate problem cases.

The current practice of the staff from state headquarters of RBI visiting a bank branch once in two or three years has been found to be inadequate in nipping problem cases in the bud. One hears about the possibility of merging some of the banks. It seems the wheel has come a full circle. Thesmall is no longer beautiful; it is the big. This fascination with bigness has been influenced by the mega-mergers taking place in Japan and the West.

In deciding on the question of mergers the government needs to keep in mind the objective of a competitive banking industry within the country. In the meantime, a second look needs to be taken at the concept of local area banks. They are superfluous in the present context and would only add to the problem of supervision. Besides, being local banks, they are likely to be susceptible, more than nationalised banks, to local political influences resulting in further aggravation of the problem of NPAs.