Speaking to The Financial Express, Selvam said, "Unless a move is made in the direction of scaling down PF rates, we cannot hope to bring down rates charged by the banking sector."

At the sidelines of CII seminar on financial reforms, Selvam told reporters that some of the large public sector banks should be privatised to improve their efficiency. "This would lead to a new chapter in the Indian banking sector," he said.

However he added that there was no need for all the public sector banks to be privatised.

Answering a question on whether interest rates should be brought down because inflation rates had come down, Industrial Finance Corporation of India managing director P V Narasimham, who was also present at the session said that this was not possibleas Indian borrowers were not ready to accept a floating rate of interest on their borrowings.

Referring to the problem of the non-performing assets (NPAs), adviser to the Reserve Bank of India M S Verma said that the problem could be solved by enacting a new financial institution debt recovery act, as in the case of Korea, Thailand and Malaysia.

"Instead of modifying nine existing acts which would take a long time, we should focus on enacting only the financial sector debt recovery act".

Korea, Thailand and Malaysia have recently enacted laws to solve their bad loan problems.

The current level of non performing assets for the banking industry- an estimated Rs 45,000 crore -is not the real problem, since it constituted only three to four per cent of the country's gross domestic product, Verma said adding what was important was controlling the slippage ratio.

The option of selling these bad loans in the secondary market is also not available to the Indian banking system, Verma said.

Selvam pointedthat the concept of NPAs in India differed from what was being followed worldwide. While total assets were being considered world over, in India only loan assets were considered and portfolio investments which are totally NPA free ignored, he said, adding that if these were considered the level of NPAs in the Indian banking would be very low.

S H Khan, former chairman and managing director of Industrial Development Bank of India said that although there had been an alarming rise in the level of NPAs no effort had been made to establish asset reconstruction companies so far.

Referring to the financial sector reforms, Khan said efforts were needed to take up enterprise level reforms like privatisation of banks to reduce government control which has constrained the banks to compete with private sector in terms of attracting quality staff.

The multiplicity of banks especially at the state level needs to be sorted through a consolidation exercise, he said adding domestic financial institutions should begiven adequate time to adjust to the norms applicable to the banking industry before being asked to move towards universal banking.