Directed lending: Sectoral allocation for credit should be dispensedwith and banks should be allowed to lend freely as per their riskperception. In case the government were to have directed credit, anyimplicit subsidy should be borne by the government and not by the banks.

Government securities market: Banks should be allowed to trade freelyin government securities within the framework of the treasury policy asapproved by their boards. Globally, trading in securities generatesubstantial profits for banks. The government securities market should bedematerialised with NSDL and trading should be available for anyparticipant. The RBI should not control any trading activity. A deepgovernment securities market will create a vibrant financial sector.

Cash reserve ratio: The CRR mechanism should be abolished totallyleaving it to banks to maintain liquidity as per their policy. Currently, 10per cent of total deposits (around Rs 75,000 crore) is held as CRR. Eventaking that this is invested in securities giving a return of even 8 percent, this would generate an income of Rs 6,000 crore which would go a longway in reducing the average cost of funds for borrowers by about 2 percent.

CRR is an outdated mechanism. Instead, a liquidity window should be providedby RBI for a pool of securities to take care of any liquidity constraints inthe system. Money expansion that would take place by the release of CRRcould be taken care by open market operations.

Maintenance of funds abroad : Indian banks maintain substantial fundsabroad out of the FCNR deposits which are lent in the inter-bank market.Indian banks should be permitted to invest and trade abroad in high-qualitygovernment securities thereby improving liquidity levels and generatinghigher yields.

Deposits and interest rates : The present minimum timeframe of 15days for accepting term deposits should be removed and banks should beallowed to accept deposit freely without any limit on the tenure or rate ofinterest. Overnight sweep accounts should be allowed to create an efficientmoney market. Banks should be free to fix the rate of interest on savingsbank accounts both on amount of deposits and tenure of deposits. FCNRdeposit interest rates should be free and left to the banks to decide.

Transitional measure for weak banks: For weak banks with a high NPA,for a transitional period till their finances improve, a special class ofgovernment securities with a slightly higher yield should be created as atransitional measure. Once the capital adequacy improves, they should havegreater operational freedom.

Regulation: From the regulatory side, the RBI should limit itsfunction to managing the monetary policy of the country without in any waycontrolling bank funds. The monetary policy should be controlled by openmarket operations, interest rates and the like and not by limiting theability of banks to accept or pay interest on deposits or restraint onlending.Operational inspection of commercial banks by RBI should be reduced.Control and regulation should be exercised more by the boards and not by theReserve Bank of India.

Clearing mechanism: A local foreign exchange clearing mechanismshould be created within India so that there is no need to clear inter-bankforeign exchange transactions through clearing mechanisms outside India.The clearing houses across the country should be privatised and not run byRBI. Electronic remittance of funds should be encouraged.

Government debt issue management: The government debt managementshould be outsourced to a specialised agency and not managed by the RBI togive dynamism to the sector.

Human resources: In order to attract good talent to the bankingsector, banks should have the freedom to fix pay scales individually and noton a collective basis. The directors on the boards (including externaldirectors) and the staff should be given market-driven compensation.