themselves in the basel committee ’ s consultative process which is not the case with indian banks. we moved early since we had completed the consultative process, and thought that we must give our banks a head start in transiting to basel iii. 47. let me then move to the more weighty question of why the reserve bank has prescribed higher capital and leverage norms for indian banks than the basel iii minimum. table 4 summarises the basel iii ( international ) prescriptions alongside the current requirements in india under basel ii, and as required under basel iii when fully implemented. 48. what is the rationale for our more “ onerous ” capital standards? note that banks in india follow the standardised approaches under basel ii. the higher prescription is intended to address any judgemental error in capital adequacy viz. wrong application of standardised risk weights, misclassification of asset quality etc. also, while advanced approaches under basel ii have been strengthened, the calibration of standardised risk weights is yet to be comprehensively effected. and more importantly, indian banks have not so far been bis central bankers ’ speeches subjected to pillar 2 capital requirement under basel ii. thus, the higher prescription addresses any potential concerns relating to undercapitalisation of risky exposures. it should also be noted in this context that even under the basel i and basel ii regimes, the reserve bank ’ s prescriptions were a percentage point higher than the international norms. experience shows that this prudence on our part had been helpful and was positive on the cost - benefit calculus. 49. please note that india has not been an outlier in prescribing higher capital standards. several other jurisdictions, particularly asian countries, have proposed higher capital adequacy ratios under basel iii as may be seen from table 5 below. 50. similarly, a question has been raised about why the reserve bank prescribed a higher leverage ratio, 4. 5 per cent, against the basel iii norm of 3 per cent. it is a matter of supervisory comfort that the indian banking system is only moderately leveraged on an aggregate basis ( 22 times of tier 1 capital approximately ). we thought it prudent not to dilute this “ comfortable ” position during the parallel run period of the leverage ratio. the basel committee is monitoring and analysing the potential impact of the leverage ratio. as indicated in our basel iii framework, we will finalize the leverage ratio requirement taking into account the final proposal of the basel committee. 8th

: this aspect of credit risk management largely relies on the monitoring and oversight exercised by the financial institutions through their policies which have to be dovetailed with the prudential norms prescribed by the regulators. the concerned financial institutions are mandated to frame prudent policies on risk management, governance, compliance, etc. these norms are intended to overcome any inherent moral hazard in the system. there are usually three layers of internal checks prescribed for the institutions - first, underwriting and due diligence at the time of origination of loans, second, adherence with internal risk management and compliance practices, and third, internal audit. this is examined as part of supervisory oversight wherein apart from assessing the efforts of financial institutions on these parameters, supervisors also assess if the general or other provisions maintained by the bank truly reflect the inherent risk. • management : factoring in the risk - and - reward payoff, the financial institutions may prefer to bear and manage some risk as part of its risk management practice. that would be essentially a business call. but in order to ensure that the regulated entities are well capitalised in proportion to the risk they are carrying, regulators across the world prescribe capital adequacy norms where minimum regulatory capital is provided by the banks based on certain principles. this then becomes the first level of risk management wherein the risk is absorbed internally, and adequate capital is provided for the same. besides, pricing of credit also influences this risk return trade - off. • mitigation : if the risk taken by financial institution grows beyond its comfort zone ( ‘ risk appetite ’ ), then they may have to manage it actively rather than merely absorbing it. this risk mitigation is enforced at two levels – first by the regulators – which is mostly prudential in nature like provisioning norms or exposure limits. second at the institutional level, wherein the institutions themselves may prescribe exposure limits to manage concentration risks or put certain collateral constraints on borrowers or prescribe stringent covenant to manage the risks. in addition, financial institutions may also deploy permitted credit risk mitigants such as loan guarantees, collateralised transactions, on balance - sheet netting, etc. to mitigate credit risks. • migration : this involves taking the risk out of the bank ’ s books. there could be several tools available for transfer or migration of credit risk, but i am going to touch upon two of them. first and probably the most popular way is to simply transfer the asset ( loan ) and associated risk to another