Efforts are under way both to reform the banking system by addressing larger corporate governance and restructuring issues as well as legal reforms, and to strengthen the regulatory capacity of the central bank. However, restructuring of banks and the introduction of stringent entry and regulatory norms are complex processes fraught with political difficulties and financial constraints. The proliferation of small banks has been due to lax entry norms. Besides significantly increasing the central bank's supervisory burden, this has led to fragmentation of capacity and uneconomic scales of operation. Consequently, the banks work on wide interest rate spreads.
Lending rates are high and profit margins thin.
High interest rates also increase the risk of default. Poor corporate governance has compounded these problems. At present, six banks, which hold 24 percent of bank deposits, are insolvent, and the finances of the remaining profit-making banks are weak.