RBI chief hints at tough norms

This is the first instance of Jalan throwing stones at the glass houses of bankers ever since he took over as the RBI governor in November last year. "The message is clear: we are in favour of tougher prudential norms, regulations and supervision. We have to follow the international standard… There is no option other than this," Jalan said.

The tightening of the prudential norms is imperative because of the increasing globalisation of the banking system. "We have toconsider three things: the uncertain world conditions, new focus on fragility of the banking system and greater inter-linkages of the system. Indian banks should be globally acceptable," he clarified.

He announced the setting up of a working group to improve the present inspection mechanism of the Reserve Bank. "As we move towards tougher prudential norms, the inspection system needs to be more refined. The IBA can come up with suggestions," he said.

Responding to the demand of bankers and a certain section of the industry to dilute the provisioning norms for non-performing assets, Jalan said: "I don’t want to relax the income recognition norms. We must reach the global standard. I know there will be problems (in achieving the global standard) for banks, the RBI and the markets… We will have to face the problem. We must send the right message to the global investors that their money is safe (with Indian banks). They should have confidence in the Indian banking system."

On bankers’ suggestion that theNPA is a much-hyped issue and Indian banking system accounts for far less NPA than some advanced countries, Jalan said: "I recognise this is not a management problem. But it is always better to have an exaggerated view on NPAs if we want to improve the situation."

Jalan made it clear that the RBI will start implementing the recommendations of the second Narasimham panel on banking sector reforms without losing much time.

Finance minister Yashwant Sinha in the Union budget kicked off the exercise by announcing raising of banks’ capital adequacy ratio (CAR) to 10 per cent by 2000. Now Jalan has committed to speed up the implementation process of the other recommendations in regard to income recognition and supervision.

He, however, hinted at rejection of other structural issues like merger of state-run banks and moving towards universal banking. "I would like the leave the issue of mergers to banks themselves. It cannot be mandated from the top," he said.

On the concept of universal banking, Jalan said:"We may have to retreat to normal banking functions and leave businesses like exposure in stock market and real estates to specialised institutions. Markets can be integrated but banks can focus on specialisation."