subsequently raised to 9 per cent with effect from 1999 - 2000. the overall capital position of commercial banks has witnessed a marked improvement during the reform period ( table 2 ). illustratively, as at end - march 2005, 86 out of the 88 commercial banks operating in india maintained crar at or above 9 per cent. the corresponding figure for 1995 - 96 was 54 out of 92 banks. improved capitalisation of public sector banks was initially brought through substantial infusion of funds by government to recapitalise these banks. subsequently, in order to mitigate the budgetary impact and to introduce market discipline, public sector banks were allowed to raise funds from the market through equity issuance subject to the maintenance of 51 per cent public ownership. ownership in public sector banks is now well diversified. as at end - march 2005, the holding by the general public in six banks ranged between 40 and 49 per cent and in 12 banks between 30 and 49 per cent. it was only in four banks that the government holding was more than 90 per cent. table 2 : distribution of commercial banks according to risk - weighted capital adequacy ( number of banks ) year below 4 between between above total per cent 4 - 9 per cent * 9 - 10 per cent @ 10 per cent 1995 - 96 2000 - 01 2004 - 05 * : relates to 4 - 8 per cent before 1999 - 2000, @ : relates to 8 - 10 per cent before 1999 - 2000. source : reserve bank of india. table 3 : non - performing loans ( npl ) of scheduled commercial banks gross npl / advances gross npl / assets net npl / advances ( per cent ) net npl / assets 1996 - 97 15. 7 8. 1 3. 3 1997 - 98 14. 4 6. 4 7. 3 3. 0 1998 - 99 14. 7 6. 2 7. 6 2. 9 1999 - 00 12. 7 5. 5 6. 8 2. 7 2000 - 01 11. 4 4. 9 6. 2 2. 5 2001 - 02 10. 4 4. 6 5. 5 2. 3 2002 - 03 8. 8 4. 4 1. 9 2003 - 04 7. 2 3. 3 2. 9 1. 2 2004 - 05 5. 2 2. 6 0. 9 source reserve bank of india. despite tightening norms, there has been considerable improvement in the asset quality of banks. india transited to a 90 - day npl recognition norm (

sector is significantly different for reserve currency countries and for developing countries like india. for the former which specialise in technology intensive products the degree of exchange rate pass through is low, enabling exporters and importers to ignore temporary shocks and set stable product prices to maintain monopolistic positions, despite large currency fluctuations. moreover, mature and well developed financial markets in these countries, have absorbed the risk associated with exchange rate fluctuations with negligible spillover on the real activity. on the other hand, for the majority of developing countries which specialise in labour - intensive and low and intermediate technology products, profit margins in the intensely competitive markets for these products are very thin and vulnerable to pricing power by large retail chains. consequently, exchange rate volatility has significant employment, output and distributional consequences ( mohan, 2004a ; 2005 ). in this context, managing exchange rate volatility would continue to be an issue requiring attention. a further challenge for policy in the context of fuller capital account opennes will be to preserve the financial stability of different markets as greater deregulation is done on capital outflows and on debt inflows. the vulnerability of financial intermediaries can perhaps be addressed through prudential regulations and their supervision ; risk management of non - financial entities will have to be through further developments in both the corporate debt market and the forex market, which enable them to manage their risks through the use of newer market instruments. this will require market development, enhancement of regulatory capacity in these areas, as well as human resource development in both financial intermediaries and non - financial entities. given the volatility of capital flows, it remains to be seen whether financial market development in a country like india can be such that this volatility does not result in unacceptable disruption in exchange rate determination with inevitable real sector consequences, and in domestic monetary conditions. if not, what will be the kind of market interventions that will continue to be needed and how effective will they be? another aspect of greater capital market openness concerns the presence of foreign banks in india. the government and reserve bank outlined a roadmap on foreign investment in banks in india in february 2005, which provides guidelines on the extent of their presence until 2009. this roadmap is consistent with the overall guidelines issued simultaneously on ownership and governance in private sector banks in india. the presence of foreign banks in the country has been very useful in bringing greater competition in certain segments in the market. they are significant participants in