To start with, it has assigned a 2.5 per cent risk-weightage on gilts by March 31, 2000; brought government-guaranteed advances on a par with corporate borrowing (sanctioned from April 1999) and laid down rules for provisioning on sticky advances backed by government guarantees (from April 2000); shortened the life of sub-standard assets from 24 months to 18 months (by March 31, 2001); called for 0.25 per cent provisioning on standard assets (from fiscal 2000); 100 per cent risk weightage on foreign exchange (March 31, 1999) and a minimum capital adequacy ratio of 9 per cent as on March 31, 2000.

Three short-term measures announced on Friday includewithdrawal of the restriction on the minimum period of three days for repo deals, introduction of interest-rate swaps to enable banks hedge against rate risk arising out of asset liability mismatches and 100 per cent risk weightage on foreign exchange open positions with effect from March 31, 1999.

The mid-term review of monetary and credit policy for 1998-99 refrained from announcing any changes in other short-term measures like the bank rate, rate and banks' cash reserve ratio (CRR) and instead focused on long-term perspectives. "This is not an appropriate day to announce measures. What we have decided to do is to take a long-term perspective and strengthen the financial soundness of the banking system," RBI governor Bimal Jalan said. Bankers across the board, however, said the tightening of prudential norms will have a severe impact on the balance sheet of some of the banks and the public sector banking industry might witness a few casualties over the next few years.

Jalan's mid-term review of macroeconomic and monetary developments has come down heavily on the burgeoning fiscal deficit of the central government. Against the backdrop of high inflation rate, uncertain outlook for industrial growth and unfavourable external environment, the policy document said: "In this situation, any increase in the fiscal deficit... would put further pressure on the outlook for medium and long-term interest rates....A significant reduction in fiscal deficit over the next two to three years is now a high national priority."

In no uncertain term Jalan has warned: "Beyond a point, it is not simply feasible for banks and financial institutions to increase the share of government securities in their overall asset portfolio without affecting their own viability and the viability of the productive sector of the economy."

In the central bank's assessment, the "best estimate" for GDP growth is in the region of 6 per cent -- which is substantially lower than the RBI projection made in April which said "Indian economy hasthe potential of attaining a growth rate of 7 to 8 per cent per year over the medium term and for the immediate future (1998-99) a growth rate of 6.5 to 7 per cent needs to be achieved in order to realise this potential."

Charting out the path for the second phase of financial sector reforms, the RBI has raised the minimum capital to risk weightage ratio from the existing 8 per cent to 9 per cent form the year ending March 31, 2000. Jalan, however, hinted at relaxation of this norm for certain banks which will have "genuine" problem in meeting the requirement.

Income recognition and provisioning norms on government-guaranteed advances are being brought on a par with other advances from 2000-2001. Provisions on existing and old government-guaranteed advances which would consequently become NPA are to be fully provided for over a period of four years beginning March 31, 1999.

It has also asked banks to make a minimum 0.25 per cent provisioning on standard assets for the year ending March 31, 2000 againstthe Narasimham panel recommendation for 1 per cent provisioning. The decision to raise further the provisioning requirement will be announced in due course, the policy document said.

Against the Narasimham panel recommendation of 5 per cent risk weightage on government papers, the RBI has assigned 2.5 per cent risk weightage by the next fiscal. It has also announced an additional risk weightage of 20 per cent would be imposed on securities of government undertakings which do not form part of government borrowing with effect from 2000-2001.

Jalan has admitted that strengthening of capital adequacy and prudential norms could pose immediate resource management problems for some of the public sector banks. "The issue of capital support from the government and enhancing public sector banks' ability to access the capital market to meet their capital requirements deserves to be... resolved at an early day as it is central to ensuring the future financial viability of the banking sector," the policy documentsaid.

On the central bank's silence on other structural issues like paring of the government stake in state-run banks, RBI said: "The Narasimham committee had also made certain important recommendations regarding reduction in government and RBI shareholding in public sector banks and some other matter on which final decisions have to be taken by the government of India."