Experience has shown that even the deterioration in bank financials does not lead to erosion of consumer confidence in such banks. This kind of consumer confidence does not extend to private sector banks. Hence, as they gain in size and share, capital enhancement and sound corporate governance become essential for financial stability.
Second, the lending ability of banks has been potentially constrained by the existing provisions for statutory pre-emption of funds for investment in government securities. A bill has been introduced in Parliament to amend the existing Banking Regulation Act to eliminate the minimum 25 per cent limit of investment in government securities.