part of the twentieth century, the role of the financial system was perceived as mobilising the massive resource requirements for growth. since the 1970s and 1980s, development economics underwent a paradigm shift. the financial system is no longer viewed as a passive mobiliser of funds. efficiency in financial intermediation i. e., the ability of financial institutions to intermediate between savers and investors, to set economic prices for capital and to allocate resources among competing demands is now emphasised. developments in endogenous growth theory since the late 1980s indicate that efficiency in financial intermediation is a source of technical progress to be exploited for generating increasing returns and sustaining high growth. these changes have provided the rationale for many developing countries to undertake wide - ranging reforms of their financial systems so as to prepare them for their true resource allocation function. as important financial intermediaries, banks have a special role to play in this new dispensation. the sharp downturn in global macroeconomic prospects and the continuing sluggishness in domestic industrial activity have necessitated a revision in the forecast for india ’ s real gdp growth in 2001 - 02 from 6. 0 - 6. 5 per cent expected at the time of the april 2001 monetary and credit policy statement to 5. 0 - 6. 0 per cent in the mid - term review of the policy. the downward revision is primarily predicated on the outlook for the industrial sector which grew by barely 2. 2 per cent in april - october 2001 as against 5. 9 per cent in the corresponding period of last year, mainly on account of the slowdown in manufacturing and mining and quarrying. capital goods production declined by as much as 6. 6 per cent and several sectors recorded a slow down in growth rate or an absolute decline. on the other hand, agriculture sector, supported by reasonable monsoon, recorded a rebound in growth. the kharif output is expected to cross a new peak of 105. 6 million tonnes and prospects for the rabi crop are also good. on the external front, merchandise exports increased marginally by 0. 5 per cent in the first eight months of 2001 - 02. while oil imports fell by 13. 4 per cent, the non - oil imports showed an increase of 8. 4 per cent. despite a moderate widening of the trade deficit, continuing buoyancy in net invisible receipts has kept the current account deficit very low. according to available data, net capital flows are also likely to be of a higher order

there are concerns that the various regulatory reforms taken together may lead to a pullback in trade finance and long - term investment financing. the global regulatory community and national governments have become increasingly sensitised to these concerns. in the area of trade finance, the basel committee consulted the world bank, the world trade organisation, and other relevant bodies. a number of adjustments were made to the capital and liquidity rules to facilitate trade finance. • in the area of capital rules, the basel committee waived the one year maturity floor for certain trade finance instruments under the advanced internal ratings - based approach for credit risk. it also waived the sovereign risk - weight floor for certain trade finance - related claims using the standardised approach for credit risk. • in the area of liquidity, the basel committee issued guidance for national supervisors to apply relatively low run - off rates for trade finance commitments. preliminary data suggests that the availability and cost of trade finance has not been greatly impacted to - date by the implementation of basel iii. spreads have normalised post - crisis and pricing appears to be influenced more by broader macro factors and competition. further, there are many well - capitalised banks, especially in asia, that are well - placed to operate in the new regulatory regime ; and many of them have stepped up. we should continue to monitor closely the impact of regulatory changes on trade finance. trade is the lifeblood of asian economies. but we have a bigger challenge in long - term financing, especially for infrastructure. it may be the case that the post - crisis financial system may not be adequately structured to provide certain types of long - term financing. • first, longer - term corporate and project finance loans already attract a higher capital charge compared to short term loans. coupled with the increased overall capital requirements under basel iii, this may create a disincentive for long - term loans. • second, to meet liquidity requirements, banks may substitute long - term lending activities with short - term lending. in calculating the net stable funding ratio, lower weights are assigned to loans with maturities of less than a year. • third, solvency ii, which will impose higher risk charges on longer - dated assets, may result in insurers de - risking by taking on shorter - dated assets. • fourth, the interaction between central clearing, margining and capital requirements may impact the variety and liquidity of some derivatives such as long - dated interest rate swaps used to hedge risks associated with long - term financing. bis central