This, in effect, means that the tightening of the income recognition and supervisory norms will not ring the death knell for weak banks like Indian Bank, United Bank of India and Uco. RBI governor Bimal Jalan announced at the global banking conference that it is left with no option but to go for a sharper regulatory regime to put Indian banks on par with its global counterparts.

Finance minister Yashwant Sinha had announced in his Budget speech raising of banks' capital adequacy ratio by two percentage point to 10 per cent over the next two years. Officially the finance ministry has shown reluctance to trade the path of "softer option" of pumpingrecapitalisation funds to save weak banks. However, sources said the Reserve Bank is against any drastic move of "killing" weak banks. It wants the Centre to continue to make budgetary provisions for recap bonds for the next few years till the weak banks are firmly put on the health track.

The Centre has already pumped in over Rs 6,000 crore to keep weak banks alive. In the current fiscal, Indian Bank needs about Rs 400 crore while Uco and UBI also need some funds to keep their capital adequacy ratio at the required level.

"There are two options before the government: Provision of recap funds or extending the deadline for achieving the capital adequacy ratio for certain banks. The Centre is likely to opt for the first option," sources said.The forthcoming busy season credit policy, to be announced in October, is likely to address some of the "structural issues" and implement stricter income recognition norms following the recommendations of the second Narasimham panel on banking sector reforms.

However,the banks will be required to implement the new norms over a period of time -- stretched over the next few years. "The RBI will sequence the second stage of reforms in an appropriate way. Banks will be given enough time to prepare themselves for the tougher regulatory regime," sources said.

Meanwhile, the Reserve Bank has constituted a panel, headed by former Asian Development Bank chief economist V V Desai, to look into the recommendations of the Khan panel on harmonisation of the role of banks and financial institutions.

The central bank wants to come out with a discussion paper and kick off a national debate on the issue over the next three months. The RBI is believed to be not in favour of going the whole hog for universal banking in a country where the debt market is not fully developed. It wants the institutions to continue to play a dominant role in backing long-term assets and banks to be active at the shorter end of the market. If it allows the institutions to access the non-collateraliseddeposit segment, liquidity ratio norms will be imposed on the financial intermediaries, sources said.