The RBI's views on the committee's recommendations are part of a discussion paper prepared by former chief economist of the Asian Development Bank, VV Desai. The paper was placed at the last RBI board meeting held in Hyderabad early this month.

For harmonising roles of banks and financial institutions, the Khan committee had recommended a gradual move towards universal banking, and called for evolving an enabling regulatory framework for this purpose. The panel also made a strong pitch for a super-regulator to monitor the financial sector. Among other things, the committee had recommended consolidated supervision of banks and institutions, cut in banks' cash reserve ratio to internationalstandards and phasing out of the statutory liquidity ratio (SLR).

The Reserve Bank is expected to take cognisance of the panel's recommendations in its October 30 monetary and credit policy. It is, however, unlikely to make any commitment on the report. The discussion paper will be soon thrown open for public debate.

Sources say the paper has highlighted that the financial system will not benefit if the role of development financial institutions (DFIs) is altered. "The gap DFIs will leave if they get out of their core business is going to be difficult to fill. While it is understandable that DFIs find it difficult to raise long-term resources to fund their core activities, and thus, are getting into the business of short-term lending, they will have to continue to play this role till an alternative is found out," a source familiar with the discussion paper said.

The sources say the paper has proposed that a relationship should be established between banks and DFIs to complement each other's activities."Banks and DFIs should tie up as they can help each other through the expertise that they have," sources said.

The feeling is that time is not right for gainful mergers between banks and institutions as each is playing a niche role for itself, and the prevailing system will continue for some time till legal reforms are carried out.

The financial system will receive a big jolt if universal banking is introduced at one go, sources said. "The financial system will have to be cleaned up, and a lot of changes have to take place before universal banking is introduced. Structural changes have to take place to create an environment ideal for universal banking in India," sources said.

They say the RBI is unlikely to allow authorised dealers licence to DFIs. "Let banks carry out forex dealings. It should not be extended to FIs," sources said.

The discussion paper is also believed to have made a case for removing the ceiling on mobilisation of resources by DFIs, which is at present linked to their net worths."Reserve requirements will have to be introduced for DFIs in due course if we proceed towards universal banking," sources said.

The Khan committee had recommended stipulation of a suitable level of SLR on incremental fixed outstandings deposits of DFIs.

INSIGHT
Prudent policy

The RBI's reluctance to be swayed by the fashion towards universal banking is to be welcomed. There is no long-term debt market in this country, and if the DFIs relinquish their role of providing long-term funds, corporates will have difficulty in finding resources for investment. The RBI is, therefore, correct to insist that a proper environment is necessary for introducing universal banking in the country.