been encouraging banks to formalize their capital adequacy assessment process ( caap ) in alignment with their business plans and performance budgeting systems. this, together with the adoption of rbs, would enable factoring in of the pillar ii requirements under basel ii. fourth, we have been expanding the area of disclosures ( pillar iii ), so as to have greater transparency in the financial position and risk profile of banks. finally, we are trying to build capacity for ensuring the regulator ’ s ability for identifying and permitting eligible banks to adopt irb / advanced measurement approaches. 3 / 7 as per normal practice, and with a view to ensuring a smooth migration to basel ii, a consultative and participative approach has been adopted for both designing and implementing basel ii. a steering committee comprising senior officials from 14 banks ( public, private and foreign ) has been constituted with representation from the indian banks ’ association and the rbi. the steering committee had formed sub - groups to address specific issues. on the basis of recommendations of the steering committee, draft guidelines to the banks on implementation of the new capital adequacy framework have been issued. implementation of basel ii will require more capital for banks in india due to the fact that operational risk is not captured under basel i, and the capital charge for market risk was not prescribed until recently. though the cushion available in the system, which at present has a crar of over 12 per cent, is comforting, banks are exploring various avenues for meeting the capital requirements under basel ii. even while we have decided to take the indian banking system on to the simple approaches under basel ii, we have taken some initiatives which would clearly demonstrate that we have no intentions of either diluting the standards or picking on the less stringent options laid down in basel ii. through these initiatives, we have prescribed stringent prudential requirements for banks in india e. g. with regard to adoption of risk weights for claims on state governments, public sector enterprises, banks and for capital market and real estate exposures. further even though banks can be allowed to use unsolicited ratings under the standardised approach, we would not allow the use of unsolicited ratings. also, we have been expanding the area of disclosures so as to have greater transparency with regard to the financial position and risk profile of banks. illustratively, with a view to enhancing further transparency, all cases of penalty imposed by the rbi on the banks as also directions issued

corporate governance can be improved by addressing a number of legal issues such as protecting and promoting shareholder rights, clarifying governance roles. ensuring that corporations function in an environment that is free from corruption and bribery ; and aligning the interests of managers, employees and shareholders through appropriate laws, regulations and other measures. all of these can help promote healthy business and legal environments that support sound corporate governance and related supervisory initiatives. in india the governance issues have been addressed by prescribing guidelines on corporate governance in banks. these include fit and proper standards for not only the board of directors but also for the shareholders and the chief executives. in this regard, it might be appropriate to mention that importance of corporate governance is relevant for the state owned banks also. the focus of the standards should be, at the least, to equip the boards of banks to ask the right questions. conclusion basel ii is expected to foster financial stability through its risk sensitive framework which will encourage banks to adopt improved risk management practices ; require supervisors to review the efficiency of banks ’ risk management practices and capital allocation methodologies ; and empower market participants to make informed judgements on the efficiency of banks and accordingly punish or reward banks. while it is true that implementation of basel ii is not the be all and end all on the subject of financial stability it must be recognised that banks are “ special ”. their sound and efficient functioning is critical not only to the growth of the real sector but also for strengthening the social infrastructure. internationally, therefore, banks have moved centre - stage and their performance is the cynosure of all eyes. acknowledgements for inputs are due to k. damodaran and dr. n. d. jadhav, reserve bank of india. 6 / 7 references : y v reddy : banking sector reforms in india - an overview - the institute of bankers of pakistan, karachi, may 2005. jaime caruana : overview of basel ii and its reflections on financial stability - the international conference on financial stability and implications of basel ii, istanbul, may jaime caruana : consequences of basel ii for smes – the european parliament workshop, brussels, july 2003 susan schmidt bies : financial stability benefits and implementation challenges of basel ii – the international conference on financial stability and implications of basel ii, istanbul, may 2005. 7 / 7