Inaugurating the 21st Bank Economists' Conference here which was organised by Canara Bank, Jalan urged for depoliticisation of the banking industry, saying: "It is...important to ensure that the ownership structure of Indian banks is such that managerial decision-making is not affected by non-economic considerations, and banks are able to raise sufficient capital in line with their increasing volume of business."

The hint was clear. The government must dilute its majority stake and banks must be allowed to run on commercial considerations.

Jalan's statement assumes immense significance against the backdrop of the second Narasimham panel recommendations which stated that the government stake should come down to 33 per cent. The finance ministry has not taken any formal decision on this "political" issue.

Later, participating in aquestion-answer session with senior bankers, Jalan pleaded helplessness in the context of the rising government borrowing and shooting money supply (M3). "The RBI is the banker of the government. Under our parliamentary system, the RBI cannot say no to the government (if the government wants to enter the market). If you have any plan to campaign on the issue (of increasing government borrowing), this is not the place. You will have to go to Delhi," Jalan said.

He also urged the bankers to push for credit offtake. "Ultimately, it is the credit business which is central to the profitability of the banking system. To the extent that excessive risk aversion among bankers restricts credit growth in the economy, it has adverse effects on profitability of the banking system as well as on economic growth," he said.

Jalan, however, had a word of caution on the rising non-performing assets (NPAs). Admitting that the amount of gross NPAs has been on the rise, he said a large number of public sector banks have highnet NPAs which are between 10 per cent and 20 per cent of their net advances and must be brought down to 3 per cent by 2002 and zero for banks with international presence.

The objective behind the reduction in public ownership in the banking industry and allowing banks to access the capital market for meeting their fund requirements, according to Jalan, is to bring out the best result in terms of pricing and quality of banking services over a period of time.

Analysts have interpreted the RBI governor's statement as significant in the context of the south-east Asian meltdown. "It is not a question of public versus private or the ownership per se. What is important is banks must be run by commercial considerations alone without any political interference. This is the best way of keeping a south-east Asian-type crisis at bay," one senior bank analyst said.

The RBI governor also made it clear that the reserve requirements must come down in order to make the banks more efficient. "While the medium-termtarget of 25 per cent and 10 per cent set for the CRR and SLR, respectively, have been by and large achieved, these ratio levels are still higher than what would perhaps look ideal in the international context," he said.

Attribituting the higher reserve requirements to monetary policy operations, Jalan said: "As financial markets develop, allowing a greater role for the interest rate in the economy, the dependence on this instrument of monetary policy would need to come down in future."