” went on to be regarded as one of the most virulent critics of the congress government ’ s economic policies during the second and third plan periods. clearly a man ahead of his time, a. d. shroff understood the importance of private investment in nation building in a liberalized, market driven environment. like every great idea awaiting its time, the liberalization that he so fervently advocated had not fully arrived in the country till the early nineties – a quarter century after he passed away. the economic liberalization that we started in the nineties has meant india integrating with the rest of the world, a process that is still work in progress. over the last ten years, india ’ s two way trade flows as a proportion of gdp have doubled ; our two way current and capital flows as a proportion of gdp have more than doubled. the experience of the global financial crisis and now the eurozone crisis has taught us that even as we benefit from integration, because of that very integration, we become vulnerable to global shocks. india ’ s embrace of globalization and the remarkable transition the economy went through after the economic reforms of the 1990s are an eloquent testimony to eminent thinkers with foresight and conviction like a. d. shroff. i can think of no better way of honouring the memory of a visionary like him than talking about india ’ s enlarged stake and growing role in bis central bankers ’ speeches global economic policy making. in particular, i will focus on the g 20 and india ’ s interests in this very vital international forum. g 20 the g 20, as all of you know, has been in the forefront of battling the financial crises – the global financial crisis of 2008 / 09 and the eurozone crisis since 2010 – that have taken a devastating toll on global growth and welfare. indeed when the history of this crisis is written, the london g 20 summit in april 2009 will be acknowledged as the clear turning point when world leaders showed extraordinary determination and unity. sure, there were differences, but they were debated and discussed, and compromises were made so as to reach the final goal – of ending the crisis. this resulted in an agreed package of measures having both domestic and international components but all of them to be implemented in coordination, and indeed in synchronization where necessary. the entire range of crisis response measures – accommodative monetary stance, fiscal stimulus, debt and deposit guarantees, capital injection, asset purchases, currency swaps,

– irrespective of quality of counter party or credit • encouraging regulatory arbitrage by cherry picking • lack of incentives for credit risk mitigation techniques • not covering operational risk as time passed, some of the major international banks began using sophisticated models to measure risk. this was when a need was felt to upgrade the basel framework. therefore, the basel committee on banking supervision thought it desirable that the present accord is replaced by a more risksensitive framework. three pillars the new basel accord has its foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks. the first pillar is compatible with the credit risk, market risk and operational risk. the regulatory capital will be focused on these three risks. the second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. concurrently, it also casts responsibility on the supervisors to review and validate banks ’ risk measurement models. the third pillar on market discipline is used to leverage the influence that other market players can bring. this is aimed at improving the transparency in banks and improve reporting. issues and challenges having given you a brief overview of the current and proposed new framework, i shall now move on to the implementation challenges for the banks especially in a developing country like india. here, i would skip the methodological details and technical nitty - gritty associated with the new accord, and concentrate instead on more profound implications for the banking industry. issues and challenges while there is no second opinion regarding the purpose, necessity and usefulness of the proposed new accord - the techniques and methods suggested in the consultative document would pose considerable implementational challenges for the banks especially in a developing country like india. capital requirement : the new norms will almost invariably increase capital requirement in all banks across the board. although capital requirement for credit risk may go down due to adoption of more risk sensitive models - such advantage will be more than offset by additional capital charge for operational risk and increased capital requirement for market risk. this partly explains the current trend of consolidation in the banking industry. profitability : competition among banks for highly rated corporates needing lower amount of capital may exert pressure on already thinning interest spread. further, huge implementation cost may also impact profitability for smaller banks. risk management architecture : the new standards are an amalgam of international best practices and call for introduction of advanced risk management system with wider application throughout the organization.