management company was not considered appropriate in view of the moral hazard. the overhang of non - performing loans had to be managed by the banks themselves. • the subsequent divestment of equity and offer to private shareholders was undertaken through a public offer and not by sale to strategic investors. consequently, all the public sector banks, which issued shares to private shareholders, have been listed on the exchanges and are subject to the same disclosure and market discipline standards as other listed entities. • the cost of recapitalization to gdp has been low relative to experience in other countries. on a cumulative basis it worked out to about one percent of the gdp. furthermore, the market value of equity held by government now far exceeds the recapitalization cost. with a view to carry the reform process further, as announced in the budget last year the government decided to convert the recap bonds issued as special securities ( basically nonnegotiable ) to marketable securities indistinguishable from other government securities. the process has already started and in 2006 - 07 the government converted nearly rs 80 billion to slr securities. the balance special securities will be phased out over a period. • banks were also allowed to diversify into various financial services and are now offering a whole range of financial products like universal banks. • active steps were also taken to improve the institutional arrangements, including the legal framework and technological system. to tackle the issue of high level of non - performing assets ( npas ), debt recovery tribunals were established consequent to the passing of recovery of debts due to banks and financial institutions act, 1993. to provide a significant impetus to banks to ensure sustained recovery, the securitisation and reconstruction of financial assets and enforcement of security interest ( sarfaesi ) act was passed in 2002. • while transfer of npas of public sector banks to separate asset management companies was not considered, an institutional mechanism to deal with distressed assets of banks and financial institutions has been created. asset reconstruction companies have been allowed to be set up which are in the private sector and operate as independent commercial entities to acquire non - performing assets from any financial entity and restructure and rehabilitate or liquidate them within a definite time frame. this has created a market for distressed assets in india. • the government securities money and forex markets have significant public policy implications for an emerging market economy. these have developed during the reform period with impressive diversification of participants and instruments. • the smooth

happened all along the yield curve. this was an important improvement of their financial environment for the countries which had experienced high risk premia and higher interest rates in the past. the euro also removed the nominal exchange rate volatility and periodical realignments among euro area countries which used to significantly distort their relative competitiveness. the euro area was created only eight years ago. we are now gaining a better understanding of the effects that it is having on the euro area economies : in a nutshell, the euro is significantly helping to bring euro area economies closer together. we are now ranking higher in terms of the optimum currency area criteria. cast your mind back to the end of 1996, two years before the euro was launched. you might remember what the common wisdom was on this side of the channel at the time … what would one have thought if somebody had said : look, in ten years ’ time the president of the ecb will come and tell you that on the 1 january 2007, a 13th country will enter the euro area ; that the euro area will have a total population of 315 million people ; that the euro is a credible currency which has kept inflation in line with its definition of price stability ; and that the anchoring of inflation expectations fully reflects this credibility. also telling you that the promise made to the investors and savers as well as to the people of europe had been kept, that the new currency is as credible, as confidence - inspiring, as solid as a store of value as were the previous most credible national currencies. what would have been the reaction of the audience? well, considering how cautious a number of analyses were at that time, one would most probably have thought that it was a fairy tale. the second lesson is that monetary integration is accompanied, and supported, by an increasing degree of economic and financial integration. we have often heard the question : what ’ s so special about a monetary union among countries that are ready for it? will it bring something that was not there before? 2 we know that by moving from several currencies to a single currency many costs are reduced or in some cases may disappear altogether. the euro has therefore contributed to reducing trading costs both directly and indirectly, e. g. by removing exchange rate risks and the cost of currency hedging among the legacy currencies. information costs have been reduced as well. the euro is also enhancing price transparency and discouraging price discrimination : this is helping to reduce market segment