banking business, banks also undertake other services such as safe custody of valuables, granting and issuance of letters of credit to facilitate international trade, buying and selling in foreign exchange and collections of bills, among others. banks also act as agent of the government and other entities to undertake agency business. extending loans and advances to the needy sectors of the economy on a priority basis is a very crucial function of the banking sector. keeping in view needs of the indian economy, banks are mandated to extend 40 per cent of their net bank credit to the priority sectors of the economy. the priority sectors of the economy include, inter alia, agriculture, weaker sections, small scale industries, education and micro finance. these norms ensure adequate flow of funds to the most important and needy sectors of the economy. but as you are also aware, over the years, banking has transformed. it is no longer the “ 3 - 6 - 3 ” banking. banking sector has become more liberalized, more competitive, more stable, more customer oriented, more technologically advanced and also more profitable. the prudential norms were implemented, interest rates were deregulated, asset quality improved, entry barriers were liberated, new products were introduced, capital was infused and risk management was improved. there was also a decline in the concentration of the banking business in a few banks. financial industry is moving towards expanded activities driven by customer needs, financial innovations, technological change, consolidation, convergence, global competition and financial inclusion. many challenges lie ahead such as stiff competition, stringent regulatory norms, shareholders demanding higher returns, and also challenges of globalization and financial inclusion. thus, as prospective successful bankers of future, each one of you should have a fairly good understanding of these opportunities and challenges to accomplish your job in an efficient way. importance of banking in the older days when banking was not prevalent, people were forced to borrow money from money lenders at very high interest rates. even today, in the rural unbanked areas of the country, people are dependent on money lenders for credit. moreover, when people had to save, they used to hoard money in their houses despite the risk of robbery. the existence of a bank, with its legal sanctity, was a solution to both these issues. banks extended loans and advances at affordable interest rates for productive as well as consumption purposes and started accepting deposits from the public. the provision of loans at affordable interest rates helped people smoothen their income and expenditure fluctuations on the one hand

capital gains that typically exceed the cost of borrowing, triggering further increases in property demand. as we now know, the global property market boom was followed by a collapse in prices that has cumulatively been very large. among the countries in figure 1 which have experienced price declines over the period, falls have been between 46 % in ireland and 3 % in new zealand between 2007 and 2011. 4 the left - hand panel of figure 3 shows that the size of fall mirrored the increase before the crisis. however, the sheer size of a rise in property prices is not the most important factor in determining how severe the bust will be. rather, what matters is whether the asset price boom is funded by credit. if so, the evidence suggests that the cost of a bust is much greater. 5 the right - hand panel of figure 3 shows that house price falls following the crisis are negatively related to the extent of credit expansion before the crisis. overall, these data show that the rapid increases in property prices and credit are typically followed by large price falls. thus, the imf ( 2011a ) studies a number of emerging market and advanced economies and finds that faster growth in mortgage credit during booms was accompanied by stronger house price growth at the time, and greater house price declines and larger increases in non - performing loans during busts. furthermore, imf ( 2012 ) finds that housing busts and recessions associated with higher leverage in the boom phase tend to be longer and more severe, while jorda, schularick and taylor ( 2011 ) find that recessions preceded by greater private - sector leverage6 are associated with worse outcomes in terms of economic growth, investment spending, and credit growth than those associated with less leverage. these effects are amplified if the recession coincided with a financial crisis. 7 overall, the international evidence shows that mortgage credit growth and the state of the economy the irish decline is based on cso data for end - 2011. for instance, the dot - com bubble was not primarily funded by the banking sector and was followed by a relatively mild recession. for a discussion on this, see crowe et al. ( 2011a ). measured as domestic bank credit as a proportion of gdp. mian and sufi ( 2011 ) show that us counties which were more highly leveraged before the crisis had greater declines in employment growth, residential investment growth and consumption growth following the crisis. dynan ( 2012 ) finds that the reduction in spending of highly leveraged households is greater than would be predicted