. to strengthen the capital base of such companies and reduce the possibility of excessive leverage, capital adequacy requirements were introduced besides the credit concentration norms. a capital adequacy ratio of 10 per cent, which is higher than that for banks, was prescribed for nbfcs - nd - si with effect from april 01, 2007. 35. apart from capital adequacy norms, single and group credit / investment concentration norms were also introduced with effect from april 01, 2007 for nbfcs - nd - si in as much as they could not lend to or invest in shares of any single entity exceeding 15 per cent of their owned fund ; and to any single group of borrowers exceeding 25 per cent of their owned fund ; or lend and invest ( loans / investments taken together ) more than 25 per cent of owned fund to a single party ; and 40 per cent of owned fund to a single group of parties. countercyclical prudential measures 36. from 2004 through 2007, in conjunction with monetary policy, the rbi used preemptive countercyclical provisioning and differential risk weights to contain excessive credit growth to sectors that showed signs of risk building up. these include sectors where asset prices were increasing rapidly ( such as real estate and capital markets ) and retail or personal loan sectors where underwriting standards, were perceived to have been diluted during the phase of very high credit growth. for instance, in 2004, a higher risk weight of 125 per cent ( earlier 100 per cent ) was prescribed for consumer credit, including personal loans and credit cards receivables. similarly, in july 2005, the continued rapid expansion in credit to the capital market and commercial real estate sector prompted the reserve bank to increase the risk weights on banks ’ exposure to these sectors to 125 per cent. about a year later in may 2006, the risk weight on commercial real estate exposure was further increased from 125 per cent to 150 per cent. in january 2007, the risk weight for bank ’ s exposure to nbfc - nd - si was increased from 100 per cent to 125 per cent. the higher risk weight applicable to these sectors were found to be an effective tool for moderating credit growth, besides serving the prudential purpose. anticipating the deterioration in credit quality that is expected in the context of high credit growth, the general provisioning requirement on standard advances in certain sensitive sectors, viz., capital market exposure, residential housing loans beyond rs. 20 lakh

which has to be the starting point for designing macro - prudential policies needs a lot of work. other important issues illustratively are : better understanding of the interaction of macro - prudential policies with other public policies, particularly with monetary policy ; development of a tool kit to deal with systemic risk ; designing of a robust early warning system regarding build up of systemic risks ; evolving an optimal mix of rules and discretion while operating macro - prudential policies ; extending the perimeter for macro - prudential instruments to cover the shadow banking system also which is going to be a very challenging task ; defining the mandate and powers of the macro prudential authority and evolving a methodology to ensure accountability of such authority ; and putting in place a framework for international cooperation, etc. 35. the institutional set up for macro - prudential authority is evolving and varies from country to country, the common denominator being that central banks typically play a major role in the conduct of these policies. the institutional structure for macro - prudential regulation in india has also undergone a change recently. rbi has historically been the macro - prudential regulator. post crisis, in india, as in several other jurisdictions across the world, the institutional mechanism for financial stability has been sought to be strengthened. in december 2010, the financial stability and development council ( fsdc ), under the chairmanship of the finance minister, has been set up to deal with issues related to, inter alia, financial stability, inter - regulatory coordination and macro - prudential supervision of the economy, including the functioning of large financial conglomerates. the council has all the financial sector regulators as members. a sub - committee of the fsdc, which is chaired by the governor of the reserve bank, will assist the committee. the sub - committee is expected to evolve as the operative body for financial stability in normal times while the fsdc would have a broad oversight and will assume a central role in crisis times. now that the fsdc is in place, conventions and practices will develop over a period of time which will, while serving the goal of financial stability, also ensure that the autonomy of the regulators is not eroded. 36. the methodology for forward looking countercyclical provisioning which is long in making, needs to be finalized at the earliest. bis central bankers ’ speeches 37. while the bcbs has put in place guidance for national authorities operating the countercyclical buffer based on the credit