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 Naraismham 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 at a question-answer with senior bankers, the RBI governor 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 Reserve Bank 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 theplace. 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.

The RBI governor, 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, Jalan said a large number of public sector banks have net NPAs as high as between 10 and 20 per cent of their net advances which must be brought down to three per cent by 2002 and zero for banks with international presence.

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

Analysts have interpreted the RBI governor's statement as significant in the context of the southeast 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-term target of 25 per cent and 10 per cent set for the CRR and SLR, respectively, have been by and large achieved, these ratio level are still higher than what would perhaps look ideal in the international context," he said.

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