While the cuurent minimum shareholding by the RBI in the State Bank of India, prescribed by legislation, is 55 per cent, the minimum holding by government in public sector banks is 51 per cent.

"On balance there seems to be a strong case for raising the legislative ceiling for market participation in equity capital of public sector banks", he said delivering the foundation day lecture at the Administration Staff College of India (ASCI), here on Monday.

In effect, the RBI governor has called for a further dilution of the government stake in the state-run banks.

Both, the SBI and other PSU banks have limited scope to raise further capital from the market at present. Their additional capital requirements over the next five years may exceed Rs 10,000 crore while the headroom available to raise capital from the market is less than Rs 1000 crore, he observed.

Considering the provision of additional capital by the RBI and the government would be tantamount to additional monetisation, he wondered if it would make economic or fiscal sense to add to this burden further.

However, considering adequate attention has to be given to agricultural credit and rural banking while maintaining the "public sector" character of these banks, it may be necessary to prescribe a maximum level for shareholding by any single individual or corporate in them, Jalan said addressing the gathering of senior bankers and academicians.

Talking of the interest rate structure, the RBI governor felt there was a need to make the system more flexible to take account of changes in economic cycles and the inflation outlook. Though it may take some time to fully meet this objective Jalan was, however, quite critical of the high level of non- performing assets of public sector banks and felt a vigorous effort by the weak banks to strengthen their internal control and risk management systems and early warning systems was needed.

The resolution of the NPA problem also required greater accountability on the part of corporates, greater disclosures in thécase of defaults and an efficient credit information system, he said.