manages large private pools of capital, there is a need to have additional capital requirements to take care of reputation, concentration and other risks not captured in the traditional framework. this is the reason why we are looking at bringing out guidance on banks managing large private pools of capital. derivatives – risks in leveraged and complex structures 10. one of the important needs of a growing and increasingly globalizing economy is for businesses to be able to focus on their main business and have efficient ways of hedging forex and interest rate risks. over more than a decade, new products in the derivatives market have been gradually introduced, to begin with mostly in otc markets and more recently on the exchanges. while many corporates and businesses have used these products for hedging, the aggressive marketing of these, especially leveraged products, and their use by businesses to ostensibly lower the cost of funding or cost of hedging have led to grief to many – banks and businesses alike. the lessons from this experience underline the need for both banks and customers to understand such products and the associated risks especially in those with leveraged and complex structures, having proper risk management policies, accounting standards and disclosures with adequate guidance to users and auditors alike for appropriate valuation and mtm practices. lending to the millions 11. a major challenge of the next decade is going to be financing the millions in the unorganized sector, self - employed in the micro and small business sector, the small and marginal farmers as also oral share - croppers in the agricultural sector ; other challenges include financing affordable housing and education needs of low income households. these households and businesses do not maintain proper books of account, have irregular cash flows and hardly any documents of property or other collateral. drawing these households into the formal banking system through opening of bank accounts is only one and albeit a very first step. the number of borrowers who had borrowed rs. 25, 000 and below from the banking system rose from 36. 8 million 2004 to 39. 2 million in 2009 – an increase of just 2. 4 million over five years. the number of borrowers who borrowed less than rs. 2, 00, 000 increased from 61. 9 million in 2004 to 95. 8 million in 2009 – although there is an increase of nearly 34 million, a vast majority of the population still remain unserved. if the coverage of those borrowing less than rs. 2, 00, 000 has to increase to at least 50 per cent of the adult population in

able to increase their tier 1 capital by an annual average of nearly 30 per cent while their risk weighted assets increased over this period by more than 26 per cent, of which about one fourth has been from internal generation, small amount from government and most of it from the capital markets. assuming the same growth in risk weight assets going forward, and given the average return on capital for the indian banks, raising capital from the markets may not be a problem. given the requirement of basel iii to have common equity as the dominant part of tier i capital, and tier i to be the major part of regulatory capital, and given that indian banks are already well placed in this respect, it would be advisable to retain the advantage even though the new norms will kick in only in a phased manner. forward looking provisioning 7. in a growing economy facing global and domestic shocks, it is likely that npas will increase and the npa ratio could go up and down. the issue, however, is whether the margins on earning assets are sufficient to make adequate provisions for expected losses, apart from generating internal accruals to support growth in the risk weighted assets. in this context, making forward looking provisions as is being considered at the basel level is extremely important for a country like india. while we have asked banks to achieve at least a pcr of 70 per cent for npas, we are also working on a scheme based on the spanish dynamic provisioning model for evolving norms for provisioning for standard assets in different sectors based on time series and cross sectional data. such provisions envisage setting aside profits in good times which can be used in down turn and provide greater comfort from financial stability perspective when the economy is pushing forward for higher growth. lending to infrastructure 8. aspiration for higher growth implies much more investment in infrastructure. needless to say, the headroom available in government finances either at the state or central level for funding or for guarantees ( explicit or implicit ) is limited. this calls for funding from both financial institutions and capital markets, both domestic and external. the single borrower and group borrower exposure limits of banks have already been relaxed to allow for more funding for infrastructure by indian banks. taking into account the concentration risk and asset - liability mismatches, any further relaxation would be imprudent. from regulatory point of view, interest rate derivatives – both otc and exchange traded – have been allowed and these provide the opportunity to hedge the interest rate risk. liquidity requirements on