the next three years, the number of borrowal accounts will have to increase annually by at least 41. 3 per cent. how are banks going to deal with this scale? standard products like gcc / ods against savings products at affordable rates will have to be offered based on the track record in savings and recovery, as there is no likelihood of offer of any security. risk mitigant products will need to be offered by the development financial institutions. already, sidbi offers today a credit guarantee product for loans to mse where there is no collateral – the scheme has recently been made more user - friendly. similar credit risk mitigation products will need to be evolved by nabard for small farmers, who cannot offer any document of proof of possession of land farmed by them, as also for the landless engaged in non farm and allied activities. suitable credit guarantees are also required for loans affected by widespread distress in the event of successive and repeated natural calamities. nhb will need to evolve similar products for minimizing documentation risk, credit risk and other risks involved in financing low income housing. enhanced and well documented property rights would also improve the collateral that households and small businesses can offer to lenders that could lead to reduction in the pricing of such loans. finally, banks will have to partner with non - banking financial companies, microfinance institutions and financial cooperatives to increase outreach as the latter have been quite innovative addressing the last mile issue. in doing so, banks ’ attention will have to shift to oversight of such portfolios – assigned or securitized – to ensure asset quality, reasonable rates of interest and fair treatment to ultimate borrowers. risk measurement for smes 12. in applying a uniform set of regulatory norms across sectors, it is possible that the nature of risk is not properly differentiated or there is a tendency for regulating the mean. it is necessary that the specific nature of certain sectors be kept in focus. first, in retail lending the activity specific cash flow patterns and portfolio level risk profile will need to be recognized. the concept of retail lending was brought into basel ii with a specific focus on smes. the diversification benefit resulting in lowering of risk was recognized ; under advanced approaches, models that factor in default behavior over business cycles provide a more realistic measure of risk. the challenge lies in enhancing capabilities amongst banks and supervisors to move to advanced approaches where the credit risk in development finance can be properly captured. second, the ratings based approach for risk weighting

you don ’ t teach the banking system a lesson by letting it collapse once in a while, but by ensuring proper regulation and supervision, even if some people don ’ t like it. similarly, you don ’ t make countries improve their fiscal discipline by making it possible for them to easily get away with restructuring their debts. this may actually create a disincentive, i. e. an incentive not to adopt the corrective measures which are needed to reform the economy. this is what actually happened in the case of greece last spring. as talks of restructuring spread from some euro area capitals, the greek government started thinking that this could be a nice way to go easy on the adjustment effort and it delayed some of the measures agreed in the programme. questioning the signature of the sovereign has very negative effects on the confidence of wholesale and retail investors, both at home and abroad. since public debt instruments play a key role in domestic financial markets and are an essential means of saving for the population, restructuring has very large wealth effects, with direct repercussions on the economy and also on society and on the democratic system. it is no coincidence that nearly all countries which have restructured their debt in the past were relatively poor and often undemocratic. as a result, psi, when applied to states, may end up costing taxpayers even more. in particular, additional financial assistance must be provided to a country which restructures its debt in order to avoid an abrupt interruption in the flow of credit and the collapse of the domestic financial system. such additional assistance may even be as large as the savings obtained from the restructuring of private sector credits. the 21 july agreement with greece, for instance, which aimed at saving around €50 billion of debt held by the private sector, required the disbursement of about €20 billion of extra assistance to recapitalise the greek banking system to avert its collapse and a larger amount to enhance the credit rating of greek bonds to be used as collateral for refinancing with the eurosystem. what ’ s the solution in this case? to prevent countries from getting again into the same difficulties as they experienced prior to the crisis we need tougher governance, with more stringent rules – not only on fiscal discipline but also on banking supervision – automatic sanctions and greater stringency on domestic decision - making for countries which request financial assistance. the negative experience with the stability and growth pact over the last decade should not undermine efforts to further strengthen the