/ service, how do you decide on which activities are remunerative and which are not? how do you decide on your product promotion and pricing strategies unless this information is readily available? why have certain products when there is no demand for them? after all, there is a cost attached to product promotion. as banks are perceived to be offering identical products and services, how does the board / top management set about differentiating their bank from others, unless they have such basic granular details? under rbs, it is essential for the banks to have the capability and infrastructure to support a robust and reliable mis architecture, with data integrity. a data warehouse wherein data flows from the transactional system without manual intervention and is capable of generating various mis reports on all major activities of the bank ( including activity - wise / segment – wise analysis ) is one of the prerequisites for effective risk management. in the absence of a reliable mis, it would be a near impossible task for the bank management to get a true and fair picture of the quality of assets, earnings, etc. risk based pricing of products and services risk - based pricing means determining loan pricing based on the expected loan risk. typically, a borrower ’ s credit risk is used to determine whether a loan application should be accepted or declined. the same risk level could be used to determine the optimal pricing. this, essentially, translates to higher interest rate for a borrower with higher risk and a lower rate for a lower risk borrower. most large banks with suitable risk management and measurement architecture normally have some form of risk - based pricing strategies based on a measure of probability of default. this is, often, not apparent in small or medium - sized banks due to lack of strategy, process and technology to drive consistent results across various loan portfolios. banks without a formal risk - based pricing approach, typically, use a flat - rate pricing model. the inherent problem with flat - rate pricing is that the bank will end up having a higher share of lower credit quality loans since the higher credit quality borrowers can obtain better pricing at other banks ( i. e. those offering risk - based pricing ). banks are required to maintain capital to cover the risks they assume. as capital always comes at a cost, they need to have a differentiated risk - based framework for pricing of products and services. this involves costing, a quantitative assessment of revenue streams from each segment, activity, product and service, and an efficient transfer pricing mechanism which would

as interest rate signals. there is no explicit interest rate target envisaged in india. nevertheless, a great deal of reliance has been placed in recent years on interest rates and exchange rates in the day - to - day conduct of monetary policy. in the context of increasing openness of the economy and a market - determined exchange rate, the large capital inflows witnessed in recent years have posed major challenges to the conduct of monetary and exchange rate management. a critical issue in this regard is a view on whether the capital flows are temporary or permanent in nature. the recent episode of large capital flows prompted a debate in india on the need for exchange rate adjustment. in a scenario of uncertainty facing the monetary authorities in determining temporary or permanent nature of inflows, it is prudent to presume that such flows are temporary till they are firmly established to be of permanent nature. the liquidity impact of large inflows was managed till the year 2003 - 04, largely through the day - to - day laf and omo. in the process, the stock of government securities available with the reserve bank declined progressively and the burden of sterilization increasingly fell on laf operations. in order to address these issues, the reserve bank signed in march 2004, a memorandum of understanding ( mou ) with the government of india for issuance of treasury bills and dated government securities under the market stabilisation scheme ( mss ). the intention of mss is essentially to differentiate the liquidity absorption of a more enduring nature by way of sterilisation from the day - to - day normal liquidity management operations. the ceiling on the outstanding obligations of the government under mss has been initially indicated but is subject to revision through mutual consultation. the issuances under mss are matched by an equivalent cash balance held by the government in a separate identifiable cash account maintained and operated by the reserve bank. the operationalisation of mss to absorb liquidity of more enduring nature has considerably reduced the burden of sterilisation on the laf window. in its monetary operations, the reserve bank uses multiple instruments to ensure that appropriate liquidity is maintained in the system so that all legitimate requirements of credit are met, consistent with the objective of price stability. towards this end, the bank pursues a policy of active management of liquidity through omo including laf, mss and crr, and using the policy instruments at its disposal flexibly, as and when the situation warrants. way