Ushering in greater fiscal discipline would be the real answer, he said.Narasimham was replying questions at a seminar on banking sector reforms organised by the Confederation of the Indian Industry (CII) here on Tuesday.

Speaking of the causes of rising inflation, he said it was a combined lag effect of easing money supply and dip in agricultural output. Three years ago, RBI tightened screws on lending to the commercial sector as the government borrowing had shot up. This resulted in the economy slowing down and when the next government eased the money supply it coincided with the fall in agricultural output by three to five per cent, he pointedout.

Earlier, delivering the keynote address he said there should be ``no conflict between social banking and sound banking'' in priority sector lending. Though the first report on banking reforms suggested a fresh look at the concept of priority sector lending with the intention of ultimately doing away with it, the reality in the form of political compulsion prompted the committee in its second report to adopt a different approach, he added.The approach is lending to that sector on commercial principles rather than to meet targets. Statistics released by RBI, he said, showed that though priority sector advances formed 40 per cent of lendings, the sector's share of NPAs was 47 per cent. It would have been much higher if the loan waivers in respect of some agricultural advances were taken into account.

SLR, he said, should not be imposed by the states. Instead, discretionary powers should be given to banks. SLR as a measure of providing funds to the government should end, he added.

He also came downheavily on the legal system which has tardy, tortuous and archaic laws. Enforcement of contract is not easy and there is also a bias against the creditor in favour of the debtor, Narasimham said. A legal system which would provide unbiased and expeditious settlement of claims alone would help the banking system reduce its gross NPAs (at Rs 43,000 crore) and attain the levels set by the committee.

On the other recommendations of the committee, he said market risks necessitated that capital adequacy be raised to 10 per cent over a period of time. Steps should also be taken to bring accounting and prudential norms to international standards thereby enhancing the transparency and credibility of banks.

Narasimham also called upon banks to effectively manage their liability portfolio. This, if done, would avoid pitfalls of asset-liability mismatches as seen in South-East Asia. He also said some hard decisions had to be taken in the case of unviable banks in order to safeguard the systemic strength of thebanking sector. Interests of the depositors and employees must also be taken care of.

Speaking on the occasion, N Kumar, former president of CII, called for greater autonomy for banks in administrative operations. He also said the legal system and automation had not kept pace with the growth.

T Anantha Narayanan, vice-president, finance, Ashok Leyland Ltd, said the banks should move away from securities-based lending to cash flow based lending.