The country has a surfeit of banks. There are the public sector banks, a half of them struggling with non-performing assets (NPA); there are the old private sector banks, some of them no longer small; and there are the urban co-operative banks, many of them thriving. Besides, there are the foreign banks, including some which came in after 1991, with a very visible presence in the metros.

The scene is changing fast. The government is inclined to dilute its stake in public sector banks. Though these will ostensibly retain their character, they are rapidly transforming themselves into competitive organisations: they have to take on the new banks spawned by ICICI, HDFC and UTI, among others.

Other changes include the formation of asset reconstruction companies (incomplete), the establishment of a powerful, functioning set-up to enforce quick loan recoveries (progress has been tardy), and takeovers of the established private sector banks (what are the rules of the game?). Banking reform is incomplete. This is hardly propitious for expanding the number of players in banking.

The RBI has its plate full. It does not want the added responsibility of keeping a tab on powerful corporates who want a clout in banking. Hence its guidelines to "discourage industrial houses to promote any new bank directly" and to bar non-banking finance companies (NBFCs), promoted by a large industrial house, from being converted into private banks.

The close link between banks and big business fuelled rapid growth in Japan and South Korea; and for that reason such linkage is favoured in India. But that very linkage is a key reason for the lingering decade-old recession in Japan as also the East Asian currency shock. India will do well to prevent such linkage. (Post-1991, PSU and private, domestic and foreign, banks have been overarchingly wooing big business to the exclusion of small industry and business. Tycoons do not need banks of their own).

Furthermore, the advances in banking regulation initiated by the Bank for International Settlements, rule out the development or even tolerance of such linkage in India. The RBI cannot but take a discouraging stance. This is important. International approval of (and confidence in) the RBI policy stance is essential if foreign investment is not to be deterred. (At present, both Indian business and government are counting on foreign investment to catalyse economic growth).

Actually, the RBI is not merely playing to the gallery of foreign capitalists. Indian banks are reeling under NPAs, a part of which can be sourced to big borrowers. This makes it difficult to bring Indian big business directly into banking. (Indeed, this is one lesson from Pakistan). Industrial houses have spawned NBFCs, many of which have weak assets; this rules out their conversion into banks.

Numbers are not the problem: competition is keen, indeed, too many banks focus on the creamy layer of economy. The real issue, unaddressed by policy, is to widen the reach of banking-into agriculture and small industry and into new ventures in the district towns.