global downturn is likely to be a prolonged one. if banks do not recognise their problem loans here and now, and deal with them expeditiously, the problem will only get compounded with the passage of time and will keep haunting them in future. ( iii ) the prudential regulatory norms ought not to be changed lightly, especially when markets are on edge. if the impression gains ground that the modified norms understate the extent of impairment and over - state the asset quality in the banking sector, the markets could suspect the worst and needlessly penalise the banks through market discipline. these are the issues we need to reflect on in moving towards further regulatory forbearance. the fourth challenge : effective implementation of basel ii framework as you are aware, a part of the indian banking system has already migrated to the basel ii framework effective march 31, 2008 and the remaining commercial banks are slated to do so by march 31, 2009. however, having regard to the state of preparedness of the system, we have, for the present, adopted only the simpler approaches available under the framework. the rbi is yet to announced the timeframe for adoption of the advanced approaches in the indian banking system but the migration to these approaches is the eventual goal – for which the banking system will need to start its preparations in all earnestness. the migration to the advanced approaches poses several significant challenges to the bankers and, as the banking regulator and supervisor, also to the rbi. the first challenge is the availability of long time - series data for computing the risk parameters required under the advanced approaches. good - quality, consistent and reliable data and information relating to the loan portfolios of the banks as also sophisticated it resources are critical to the proper risk assessment under the basel ii framework. data limitation is a key impediment to the design and implementation of credit risk models. this may prove to be a major challenge for us in india, given the wide - spread branch network – though the increasing computerisation in the banking industry should prove to be of great help. the second challenge is that the advanced approaches for credit risk and operational risk envisaged under the basel ii framework also require use of risk models by the banks. this, in turn, requires internal validation of these models by the banks themselves as also by the supervisors before the models can be permitted to be used for regulatory capital purposes. such a validation process demands expert skills which need to be developed and nurtured. third, since basel

duvvuri subbarao : the global financial turmoil and challenges for the indian economy speech by dr duvvuri subbarao, governor of the reserve bank of india, at the bankers'club, kolkata, 10 december 2008. * * * it is my pleasure to be here this evening and to be able to share my thoughts with an exclusive gathering of bankers. since this is an in - house meeting and we are professional colleagues, i propose to be frank and forthright. i am glad to know that the bankers'club in kolkata has been recently revived and is engaged in promoting professional interaction within the banking community. the global financial crisis is now the staple of front page news. banks around the world, including those in india, are in the forefront of managing the challenge of crisis resolution. since it is so topical, i would like to take this opportunity to share my perspective on the current global turmoil, its impact on india, the outlook for the indian economy and the challenges that lie ahead for the indian banking system, in particular. global financial outlook the global financial situation continues to be uncertain and unsettled. what started off as a sub - prime crisis in the us housing mortgage sector has turned successively into a global banking crisis, global financial crisis and now a global economic crisis. text book economics often cites housing as a prime example of a non - tradable good. it is paradoxical that a quintessentially non - tradable good as housing has triggered a crisis of global dimensions. this crisis is also the first of a kind in the sense that it is the first financial crisis since the great depression that originated in the advanced economies and rapidly engulfed the whole world. such is the depth and sweep of financial globalisation. by far, the most frequently asked question ( faq ) today is whether the worst – in terms of the financial sector meltdown, and in particular, failure of financial institutions – is behind us. no one is really willing to take a definitive call on this, which is a sign of the increasing number of unknown unknowns. even as recently as six months ago, there was a view that the fallout of the crisis will remain confined to the financial sector and that, at the most, there would only be a shallow recession in the advanced economies. these expectations, as it now turns out, have been belied. the contagion has traversed from the financial to the real sector ; and it now looks like the recession will