in efficiency and customer service. the share of private and foreign banks in total assets increased to 27. 6 per cent at end - march 2006 from 24. 7 per cent at end - march 2005 and less than 10. 0 per cent at the inception of reforms. the prudential regulatory norms for the banks for capital adequacy, income recognition, asset classification and provisioning have progressively moved towards convergence with the international best practices. the basel – ii capital adequacy framework is being implemented in a phased manner, and the rbi has issued the final guidelines recently. a three - track approach has been adopted for the three types of banks, i. e., commercial banks, cooperative banks and regional rural banks, to facilitate smooth transition. these norms have strengthened the financials of the banking sector, as evident from a decline in non - performing loans and improvement in capital adequacy ratio – despite progressive stringency of the norms. for instance, as on march 31, 2007, nine out of 25 public sector banks have reported zero net npas, as a proportion to the total advances. this has been possible also on account of certain legislative and institutional measures implemented to expedite and facilitate the recovery of npas through special tribunals and restructuring mechanism. there is an increasing focus on governance aspects in the banks through adoption of “ fit and proper ” criteria for the owners, directors and senior managers of the banks. the reserve bank has also initiated a number of steps – institutional, procedural and operational – for making the payment systems safe, secure and efficient. for efficiency enhancements and risk reduction, usage of the real time gross settlement ( rtgs ) system and other electronic payment mechanisms have been encouraged in a big way. the reserve bank has also provided a significant thrust to implementation of information technology in the banking sector. to strengthen the supervisory framework within the rbi, a board for financial supervision ( bfs ) was constituted in 1994, comprising select members of the reserve bank ’ s central board with a variety of professional expertise to exercise “ undivided attention to supervision ” and ensure an integrated approach to supervision of commercial banks and financial institutions. the reserve bank also instituted an off - site monitoring and surveillance ( osmos ) system for banks in 1995, which provides for early warning system ( ews ) as also a trigger for on - site inspections of the vulnerable institutions. the scope and coverage of off - site surveillance has since been widened to capture various facets of efficiency and risk

branch licenses and customer base. the realisation of bad assets in such cases is much better than in cases under liquidation. moreover, depositors having deposits more than the insured amount also get back a substantial part of their deposits. at the same time, payout by the dicgc is substantially reduced. moral hazard is sought to be reduced by restricting such solutions to the legacy cases and progressively bringing cooperative banks on par with commercial banks in terms of minimum prudential standards and supervisory rigour. line of credit 10. in the context of funding deposit insurance, the availability of line of credit from the central bank / government to overcome temporary liquidity problems in times of crisis is very important. in several countries deposit insurers heavily rely on such lines of credit. in india too there is a provision for such accommodation from the reserve bank of india. though this facility is limited to inr 50 million ( equivalent to a little over us dollar 1 million ), it has never been used by the corporation. a collateralised funding arrangement is something that may be explored when it is required to deal with situations where markets have become illiquid. taxation issues 11. an important issue having a bearing on funding is taxation of income or surpluses available with the deposit insurance system. taxation practice varies from country to country. in asia region such income / surplus is exempt from tax in most of the countries, but there are certain countries 2, including india, where tax is levied either on the premium income or on income from investments or the entire surplus of the deposit insurance system. in india, the entire net surplus of dicgc is subject to taxes. as a result, a major part of the funds collected by the corporation by way of premium is paid to the government as taxes. you may be surprised to learn that dicgc is among the top five taxpayers in the country. deposit insurance activity being a welfare activity to protect the interest of small depositors and help maintaining financial stability, there is a strong case for exempting deposit insurance from income tax. this will enable the deposit insurer to build up sufficient funds even to meet a situation of systemic dimensions. deposit insurance for financial stability – some current issues 12. the recent financial crisis has highlighted the importance of deposit insurance in promoting financial stability. the steps taken by governments and deposit insurance systems all around the world have helped in restoring stability in the system but have also raised the issue of moral hazard, as aptly summarised by sebastian sc