on the potential risks of rising bank exposures to real estate, among other sensitive sectors based on the incurred loss method. however, what we did have was a clear trend in significant year - to - year increase in aggregate bank credit. the indian financial system is still largely a bank - intermediated system and for this reason, the bank credit channel becomes a key monetary policy transmission instrument. thus the aggregate bank credit growth has always formed an important variable in the conduct of monetary policy. the credit - deposit ratio, particularly on an incremental basis, has been an important indicator. 13. in view of the rapid credit expansion in the period 2003 – 2006, in addition to the countercyclical measures being taken, it was explicitly indicated by the rbi in april 2006 that growth of non - food bank credit, including investments in bonds / debentures / shares of public sector undertakings and private corporate sector and commercial paper, will be calibrated to decelerate to around 20 per cent during 2006 – 07 from a growth of above 30 per cent. inflationary expectations had also started firming up and as part of monetary management, the repo rate was increased by 175 basis points in stages to 7. 75 per cent by april 14, 2007 from its level of 6. 0 per cent in september 2004. further, the crr was raised by 200 basis points in stages from 4. 5 per cent in september 2004 to 6. 5 per cent. specific case of real estate 14. from a regulatory perspective, the key observable features that tilted the balance in favour of some kind of pre - emptive sectoral action, aimed primarily at preparing the banking sector to better manage the potential downsides, were the following : ( i ) the onsite inspections of banks had started giving indications of the negative fallouts of the euphoria evident in lax underwriting standards and a few frauds that came to light ; ( ii ) there were emerging signs of underpricing of risks as the real estate prices were spiralling fuelled by ample liquidity and the dominant wealth effect transmittal from the stock market boom. there were clear tax incentives at work here which made utilisation of stock market gains into real estate an extremely tax - efficient arrangement. ( iii ) a new factor in the housing credit market that was emerging was the mortgages for investment purposes – the trend for second homes, particularly in metros having a rising population of young, skilled job owners with salaries

##ters to reconsider and, most importantly, overhaul the then - prevalent incurred loss model by assessing alternative approaches for recognising and measuring loan losses. accordingly, the fasb and the iasb reacted by issuing two new accounting standards to determine credit impairment and how to measure credit risk. in particular, the iasb issued the ifrs 9 based on the expected current loss model while the fasb issued its own standard introducing the notion that provisions should cover the whole expected loss of the loan from inception. regardless of the technical differences between the two, the crucial element is that both use as a key element the expected loss concept to account for credit losses. in any event, it is fair to say that the new provisioning standards introduce major changes compared to pre - crisis practices. one important change refers to the way that credit loss provisions should be recognised in a timely fashion because it was perceived that the incurred loss model, in force when the crisis took place, considered credit losses “ too little 3 / 7 and too late in the cycle ”, and that affected directly the amount of provisions set aside by banks ( deemed very small and highly insufficient ). a direct consequence of the implementation of the expected loss model is a more timely recognition of credit losses together with an envisaged improvement in banks ’ credit risk management. these two elements are expected to positively and significantly contribute to the stability of the banking system. nonetheless, this assumption largely depends on banks ’ awareness and commitment in terms of their ability and willingness to appropriately capture the risk embedded in their loan portfolio. all in all, to understand the performance of the loan book, one has first to look at the specific process of granting loans. here, the following elements are crucial : ( i ) setting appropriate credit standards, ( ii ) proper valuation of collaterals and ( iii ) development of sound credit risk models. as to credit standards, pricing policies are crucial as they should be oriented to cover, at least, the costs of financing, structure and credit risk inherent to each type of operation. banks should calculate the cost of the credit risk for different homogeneous risk groups in a manner consistent with their history of recognition of defaults and associated losses and recoveries, as well as with expected economic developments. data integrity, reliable documentation of losses and adequate modelling to project expected losses ahead all play a key role in this respect. the setting of global limits to credit as a means of controlling the volume of the risks incurred, their evolution over time, their maturity