Addressing the India Finance Forum here, Woicke said the desire emanated from the current policy dialogue which seems to be ready with its resolve to weigh various options of lessening government control over commercial banks.

In fact, IFC is already in discussions with members of the Verma Committee on the possibility of setting up a specialised investment fund by it which would take over the loans of corporations and swap claims for equity, leaving the institutions to lengthen maturities and provide interest relief, Woicke told the gathering of bankers, economists and corporate executives.

IFC has suggested the mechanism for a viable corporate financial restructuring which has already been tried out in the East Asian economies by the World Bank group, he said. While funds like these would focus on corporate restructuring including taking control of firms if needed, they would be managed by private sector with a possible mix of domestic and foreign management.

The government could create a number of these funds which could compete for the purchase of non-performing loans of banks, Woicke suggested. Stating that India could learn much from the East Asian experience, Woicke observed that while IFC was fortunate enough to support the launch of two successful institutions, it remains difficult to restructure a number of second best public sector banks. IFCs latest efforts are in helping some older private sector banks to catch up with the newcomers and transform themselves into truly modern commercial banks.

However, two major issues on the policy front still remain to be addressed which could prove to be unpopular. These are to reduce government stake to below 50 per cent and with it to give bank managements real autonomy and incentives to compete, and secondly to wean the weakest public sector banks off renewed subsidies and come up with a restructuring strategy to address the NPA problem.

"While the government's desire for gradual change is quite understandable it would seem clear there is potential for a serious future problem which could negatively affect not only the whole banking system, but with the real sector too", he said.