TALLINN, Estonia -- Tougher supervision and a new banking law aim to strengthen Estonia's fledgling banking system, which grew quickly in the first months of independence only to shrink just as abruptly as problems emerged. Bankers and Central Bank officials said the changes would improve the position of banks in Estonia's rapidly developing economy. "Now, the sector is strengthening and banking supervision has developed to the level where we know if something is going wrong," Anu Holter, the deputy head of banking supervision at the Estonian Central Bank said in an interview. "We have a couple of smaller banks that are weak. I think four of them will merge at the end of this year. They are too little and do not play any role in our economy." A rash of new commercial banks sprang up in Estonia towards the end of the Soviet era and in the early days of independence from the former Soviet Union. But many were little more than foreign exchange booths or tiny banks buying and selling currency, and there were far too many financial institutions for a country of just 1.6 million people. But with the introduction in June 1992 of the Estonian kroon, which was pegged to the mark, currency exchange became less profitable and many of the new banks were swept away. The total number of commercial banks has halved to 21 from 42 at the beginning of 1992, mostly through mergers, the Bank of Estonia said. Holter said more mergers were likely soon. One factor behind further mergers will be new Central Bank rules stepping up banks' minimum capital requirements. By April 1995 banks must have a minimum capital of 15 million kroons ($1.13 million), but this will rise to 25 million by April 1996 and 35 million by April 1997. The current minimum is 6 million kroons. Estonia tightened bank supervision after failures at three large commercial banks in late 1992 and early 1993. Two, hit by a freeze on their accounts with the then Russian foreign trade bank Vneshekonombank, were merged. Another, the Tartu Commercial Bank, failed because of bad loans and was liquidated, a Bank of Estonia official said. Among requirements introduced last July, banks must have a solvency ratio of 8 percent and the maximum loan available to one client may not exceed 50 percent of the bank's funds. As a result of this limit, many banks have said they will be seeking new equity this year. An official at Hansapank, Estonia's biggest by assets, said it aimed to increase its equity to 200 million kroons by year-end from about 70 million. "The main reason is to raise the loan portfolio to satisfy our big clients. They have grown pretty fast so we have to grow faster because they need to be financed," said Gerd Muller, head of the bank's branches department. Average interest rates on loans to individuals and companies fell to 22.86 percent by April 1994, down from 28.50 percent six months previously, reflecting the kroon's stability and Estonia's economic recovery. Estonia was the first former Soviet republic to report economic growth since the Soviet Union fell apart. Muller said many banks had decided to raise money by selling their shares in Estonia. Hansapank had also been in talks with institutions such as the International Monetary Fund and the European Bank for Reconstruction and Development about taking a stake. At Hansapank, where staff numbers have more than doubled to 300 in the last year, most clients are enterprises. However, despite being hampered by a lack of technology, banking services for individual citizens are developing. Cash dispenser machines have appeared in recent months and four Estonian banks have been permitted to allow client businesses to accept some major Western credit cards. Some richer clients wanted deposit accounts and access to mutual funds.