Dr Jalan has pointed out that one of the reasons for the Asian crisis was the fragile banking systems in the affected countries and the lack of supervision. This is undoubtedly true, although restrictions on lending to real estate and the reluctance of Indian banks to lend against shares insulate them against two sources of instability. However, that is hardly any cause for self-congratulations. The weaker banks have to be rehabilitated through the asset-reconstruction companies.

The restructuring of the Indian economy, coupled with an antediluvian system for debt recovery will ensure that NPA levels will remain high. Under these circumstances,there exists a dire need for bankruptcy legislation along the lines of chapter 11 in the US, which will enable companies to restructure. That's apart from the drive for recovery and settling cases through compromise proposals, which seem to be yielding good results. And most importantly, the regulator must insist on more transparency, which alone will enable them to avoid the mistakes made by the Korean and Thai banking systems. The sooner international standards of prudential regulation are introduced, the better.

But international banking currently has more on its plate than just NPAs. One concern has been the move towards universal banking. The received wisdom has so far been to break down barriers between financial institutions, creating universal banks or bancassurance behemoths. By suggesting that specialised institutions could handle the securities business and other recent diversifications, the RBI governor has set the cat among the pigeons. The suggestion that firewalls should exist between thebanks' traditional business and their riskier and more volatile activities is not new. This proposal is particularly favoured by regulators since it facilitates control. But there seem to be no good reasons why banks can risk millions in the foreign-exchange markets but cannot do so in the stock markets. Nevertheless, indiscriminate lending by banks has been the source of much current financial instability worldwide, and concerns about financial health are uppermost in the minds of regulators. To be sure, increasing the efficiency of resources in the banking sector continues to be necessary. But in the present international climate, it is better for regulators to put innovations on the backburner, and err on the side of caution.