Stating this at Becon 2000 in New Delhi on Wednesday, Planning Commission member Montek Singh Ahluwalia said that the timing for exercising this flexibility would be up to the government.

He also asserted that it would be one of the most important provisions for putting in place the external environment needed for a healthy growth of the country's banking system in the face of competitive pressures.

"Internationally, the mood of the moment", he said, was that virtually any involvement of the government created the suspicion that the banking system was not working on sound lines, he said, adding that there was the attendant problem of moral hazards, where the government as the owner could not allow banks to go bust, though even in the case of private banks they might bail out the depositors.

The Planning Commission member listed several other factors which contributed to the external environment. He cautioned that while banks had to follow prudential norms and provisioning, they alone could not bring about an improvement in the system.

Banks would have to be better organised internally, and would have to upgrade their training systems to global standards, he said.

Mr Ahluwalia said that if top public sector banks were able to gain a larger market share rather than the expected shrinkage, there would be pressure on the weaker banks and the government might be forced to take a more urgent view of the matter. "This, in effect, should be the objective of second generation reform in the banking sector," he added.

On capital account convertibility, he emphasised that the country was not yet ready for it. He pointed out that even complete covertibility on the current account had not been achieved yet. For that, tariffs had to be brought down, he said.

Mr Ahluwalia also clarified that the East Asian financial crisis had occurred not because of foreign direct investments.