risk independently. enterprises worldwide are, therefore, now putting in place an integrated framework for risk management which is proactive, systematic and spans across the entire organisation. banks in india are also moving from the individual silo system to an enterprise wide risk management system. while the first milestone would be risk integration across the entity, banks are also aware of the desirability of risk aggregation across the group both in the specific risk areas as also across the risks. banks would, therefore, be required to allocate significant resources towards this endeavour. 7. capital efficiency : basel ii prescriptions have ushered in a transition from the traditional regulatory measure of capital adequacy to an evaluation of whether a bank has found the most efficient use of its capital to support its business i. e., a transition from capital adequacy to capital efficiency. in this transition, how effectively capital is used will determine return on equity and a consequent enhancement of shareholder value. in effect, banks may adopt a more dynamic approach to use of capital, in which capital will flow quickly to its most efficient use. this revised efficiency approach is expected to guide the return - on - equity strategy and influence banks ’ business plans. with the extension of capital charge for market risks to the afs portfolio this year and the coming into force of basel ii norms in march 2007, banks would need to shore up the capital levels not only for complying with these requirements but also for supporting the balance sheet growth. with a view to enhancing the options available to banks for augmenting their capital levels, the reserve bank has recently permitted banks to issue new capital instruments, including perpetual instruments. a notable feature of these instruments is that these are designed to help banks in not only managing their capital effectively but also efficiently. enhancing corporate governance 8. the issues related to corporate governance have continued to attract considerable national and international attention in light of a number of high - profile breakdowns in corporate governance. this becomes all the more relevant for banks since they not only accept and deploy large amount of uncollateralized public funds in fiduciary capacity, but also leverage such funds through credit creation. banks are also important participants in the payment and settlement systems. in view of the above, legal prescriptions for ownership and governance of banks in banking regulation act, 1949 have been supplemented by regulatory prescriptions issued by rbi from time to time. 9. in view of the importance of the banking system for financial stability, sound corporate governance

four options to choose from : they can build a new system themselves, or buy best of the modules, or buy a comprehensive solution, or outsource. in this context banks need to clearly define their core competencies to be sure that they are investing in areas that will distinguish them from other market players, and give them a competitive advantage 6. a further challenge which banks face in this regard is to ensure that they derive maximum advantage from their investments in technology and avoid wasteful expenditure which might arise on account of uncoordinated and piecemeal adoption of technology ; adoption of inappropriate / inconsistent technology and adoption of obsolete technology. capacity building 17. as dictated by the changing environment, banks need to focus on appropriate capacity building measures to equip their staff to handle advanced risk management systems and supervisors also need to equally equip themselves with appropriate skills to have effective supervision of banks adopting those systems. in the likelihood of a high level of attrition in the system, banks need to focus on motivating their skilled staff and retaining them 7. skill requirements would be significantly higher for ubs ag, the bank for banks industry challenges. august 2004 ms. k. j. udeshi, financial system stability and basel ii - way forward, sri lanka, august 2005. banks planning to migrate to the advanced approaches under basel ii. capacity building gains greater relevance in these banks, so as to equip themselves to take advantage of the incentives offered under the advanced approaches. 18. a relevant point in this regard is that capacity building should be across the institution and not confined to any particular level or any particular area. the demand for better skills can be met either from within or from outside. it would perhaps be worthwhile to first glean through the existing resources to identify misplaced or hidden or forgotten resources and re - position them to boost the bank ’ s efforts to capitalise on available skills. this does not undermine the benefits that a bank may derive by meeting their requirements from the market, but is only intended to prioritise the process. conclusion 19. the global challenges which banks face are not confined only to the global banks. these aspects are also highly relevant for banks which are part of a globalised banking system. further, overcoming these challenges by the other banks is expected to not only stand them in good stead during difficult times but also augurs well for the banking system to which they belong and will also equip them to launch themselves as a global