The hike in the capital adequacy ratio is line with the Narasimham Committee recommendations set up in December 1997 to bring about the second phase of financial sector reforms.

The panel had suggested that the minimum capital to risk assets ratio be increased to 10 per cent from its present level of 8 per cent by 2002. "It would be appropriate to phase the increase as was done in the previous occasion. Accordingly we recommend that an intermediate target of 9 per cent be achieved by year 2000 and the ratio of 10 per cent by 2002.

The RBI should also have the authority to raise this further in respect of individual banks if in its judgments the situation with respect to their risk profile warrants such an increase", the panelhad said. The panel had made it clear the report that in respect of the PSBs the additional requirements would have to come from the market.

"With the many demands on the budget and the continuing imperative need for fiscal consolidation, subscription to bank capital funds cannot be regarded as priority claim on budgetary resources. Those banks which are in a position to access the capital market at home or abroad should therefore be encouraged to do so", the panel had suggested.

The committee is of the opinion that the risk weight to government-backed guarantees should be the same as the regular advances.

To ensure that banks do not suddenly face difficulties in meeting the capital adequacy requirements, the new prescription on risk weight for government-backed advances should be made prospective from the time the new prescription is put in place, it said.

These are also likely to be implemented, sources in the Reserve Bank said.