The move is in accordance with the recommendations of the second Narasimham committee's report which had said that the RBI should not play the dual role of owner and regulator. This move, sources said, will ultimately pave the way for the divestment of the RBI's shareholding in the State Bank of India (SBI) to below 50 per cent. According to sources close to the central bank, the divestment in the SBI by the RBI in the secondary market will bring in about Rs 6,000 crore, which will at a later stage be transferred to the government's coffers. However, this divestment will need an amendment to the SBI Act which the government will soonundertake. Under the SBI Act, the RBI's holdings in the SBI cannot fall below the 55 per cent at any time.

"The move to divest shares in SBI, Nabard and NHB will be in line with the principle that the regulator cannot be a market player," a source familiar with the process said.

Last week, finance secretary Vijay Kelkar had indicated that bank privatisation was high on the finance ministry's agenda. "The finance ministry plans to bring out a paper on the second phase of financial sector reforms. One of the likeliest issues that will be included in this is privatisation of public sector banks," Kelkar said.

The second Narasimham committee on banking sector reforms had said that the Reserve Bank's stake in the SBI should be reduced to 33 per cent from the current holding of around 68 per cent. Sources said the government's decision to accept the RBI's decision to divest its stake in the NHB and Nabard will kick off changes in the regulatory and supervisory aspects of universal banking. As the apex banksin housing and agricultural credit, the two institutions share regulatory functions with the RBI.

The Reserve Bank has now proposed that with the divestment of its shareholding to the government, these two apex banks can come under the overall framework of the Board of Financial Supervision (BFS).

The apex bank is also deliberating on whether to spin off the BFS into a separate supervisory structure or not, sources said, adding that a decision in this regard cannot be taken very soon. The Narasimham committee had suggested that all regulatory and supervisory functions in regards to rural and housing credit should vest with a Board for Financial Regulation and Supervision (BFRS). Although the RBI is willing to complete the divestment process in Nabard and NHB over the next two years, it is likely that the government will tread a cautious path because of the ballooning fiscal deficit which will limit the government's ability to pay for the shares.