to be mitigated where possible, and shared where not. real risk mitigation requires ensuring that key permissions for land acquisition and construction are in place up front, while key inputs and customers are tied up through purchase agreements. where these risks cannot be mitigated, they should be shared contractually between the promoter and financiers, or a transparent arbitration system agreed upon. so, for instance, if demand falls below projections, perhaps an agreement among promoters and financier can indicate when new equity will be brought in and by whom. this leads to the third element of project structuring – an appropriately flexible capital structure. the capital structure has to be related to residual risks of the project. the more the risks, the more the equity component should be ( genuine promoter equity, not fake borrowed equity, of course ), and the greater the flexibility in the debt structure. promoters should be incentivized to deliver, with significant rewards for on - time execution and debt repayment. where possible, corporate debt markets, either through direct issues or securitized project loan portfolios, should be used to absorb some of the initial project risk. more such arm ’ s length debt should typically refinance bank debt when construction is over. hopefully, some of the measures taken to strengthen corporate debt markets, including the new bankruptcy code, should make all this possible. fourth, financiers should put in a robust system of project monitoring and appraisal, including where possible, careful real - time monitoring of costs. for example, can project input costs be monitored and compared with comparable inputs elsewhere using it, so that suspicious transactions suggesting over - invoicing are flagged? and finally, the incentive structure for bankers should be worked out so that they evaluate, design, and monitor projects carefully, and get significant rewards if these work out. this means that even while committees may take the final loan decision, some senior banker ought to put her name on the proposal, taking responsibility for recommending the loan. it systems within banks should be able to pull up overall performance records of loans recommended by individual bankers easily, and this should be an input into their promotion. note that none of this is really futuristic, but it requires a much stronger marriage between information technology and financial engineering, with an important role for practical industry knowledge and incentive design. there are also inputs to making profitable project loans – such as the availability of casa deposits – that will be accrue to

the banks that build out their it to access and serve the broader saver cheaply and effectively. few banks have the inhouse talent to do all this now, but preparation is imperative. bis central bankers ’ speeches an area of more intensive use of it and analysis is customer loans, which is my second example. it seems today that, having abandoned project loans, every bank is targeting the retail customer. clearly, the risks in this herding will mount over time, as banks compete for less and less creditworthy customers. but some of this risk can be mitigated if they do sufficient due diligence. new means of credit evaluation are emerging. for example, some lenders are examining not just credit histories from the credit bureau but mining their own data and also data from social media posts by the applicant to see how reliable they might be. various forms of crowdfunding, intermediated by peer - to - peer lenders, also claim superior credit evaluation. of course, much of the hoopla surrounding these new forms of lending has yet to be tested by a serious downturn, and it is unclear how responsibilities for recovery will devolve between intermediary and investor at such times. nevertheless, in this information age, not only are there more data with which to determine a loan applicant ’ s creditworthiness, it is also possible to track their behavior for early warning signs of stress. furthermore, in this interconnected world, a borrower ’ s inability to hide adverse information such as default when tagged by a unique id constitutes a big incentive to repay. importantly, banks no longer have a monopoly over all credit - related data ; some it companies may do a better job in pulling together even the bank ’ s data, in addition to trawling for other available data, and analyzing it all to make better lending and monitoring decisions. loan applications and decisions are now being made entirely online, without a borrower having to step into a branch. alliances between it companies and banks are likely to increase significantly. the bottom line is that competition is increasing, and ways of delivering financial services are changing tremendously. banks have to discover strategies to use their traditional, although eroding, advantages such as convenience, information, and trust to remain on the competitive frontier. competition and innovation constitute a particularly volatile mix in terms of risk challenging banks ’ traditional risk management capabilities. they are also a challenge to the regulator, who wants the best for the customer ( and therefore wants to encourage