programmed to producing financial results as per indian gaap will need to be modified. third, as for any other new venture, banks will need to build capacity for making a seamless transition to the new standards and for the adoption of the expected - loss approach to loan loss provisioning. 36. the reserve bank has constituted a working group to address the implementation issues and to formulate operational guidelines to facilitate the convergence of the indian banking system with the ifrs. the members of the group include representatives from the indian banks ’ association ( iba ), the institute of chartered accountants of india ( icai ) and various regulatory and market related departments of the reserve bank. besides, professionals with core competence, expertise and experience in ifrs implementation have been drafted in as special invitees. macroeconomic impact of the proposed bcbs reforms 37. the benefits of the reform package arise from reducing the frequency, severity and public costs of financial crises and minimizing the consequent output losses. the costs arise by way of possible higher lending rates and lower overall lending. will the benefits of more stringent regulation and supervision outweigh the potential costs? will the result be the same in the short - run as well as in the long - run? these are the questions uppermost in everyone ’ s mind, most of all in the minds of governments and regulators. three recent studies have addressed this question – two by the bank for international settlements ( bis ) and the third by the institute for industrial finance ( iif ), a washington based private sector body which articulates the banks ’ point of view. 38. the bis studies report that if the new requirements are phased in over four years, each percentage point increase in capital would reduce annual growth by 0. 04 to 0. 05 percentage points during the implementation period or about 0. 2 per cent over the four year period. however, as the financial system makes the required adjustment, these costs will dissipate and then reverse in the medium term, and the growth path will revert to its original trajectory. to summarize, the cost - benefit calculus will possibly be negative in the short - term, albeit modestly, but will be distinctly positive in the medium to long term. 39. the iif study estimates significantly higher sacrifice ratios. according to this study, the g3 ( us, euro area and japan ) will, if they implement the reform package in full, lose growth of up to 0. 6 percentage points over the

impact on banks ’ balance sheets as well as the national economies. 5. quite understandably, there has been a lot of international media attention on the implications of the basel iii proposals and their pros and cons. we have had some of that in india too focusing on what the proposed reforms might mean for us. i thought the most efficient way to use this ficci - iba platform that you have so kindly provided me is to highlight the broad contours of the basel iii proposals and their potential implications for indian banks. the theme of this conference, “ banking 2020 – making the decade ’ s promise come true ” is very appropriate as the banking sector needs to evaluate how best it can contribute to the double digit growth and rapid poverty reduction that we are aspiring to. hopefully, the assessment of the basel iii package that i will give will contribute to a more informed evaluation of the role that banks should play in our growth process. 6. let me start by taking each of the major components of the basel iii package. on each, i will explain what the proposal implies in general and then look at it from an indian perspective. i. capital adequacy framework – bcbs proposals improving quality, consistency and transparency of capital 7. the proposals regarding the capital adequacy framework aim at ensuring that the quality of capital is high, there is consistency in the definition of capital across various jurisdictions and that there are appropriate disclosures to make the capital base transparent. the focus is on making common equity the predominant form of bank capital and to enhance the loss absorbing capacity of the other elements of regulatory capital. the key changes include prescription of an explicit minimum tier i requirement ; deduction above a certain threshold, from common equity, of significant investments in the common shares of unconsolidated financial institutions and deferred tax assets arising from timing differences etc. ; limiting the recognition of minority interest in group capital to the extent of its share in the minimum capital required for subsidiary banks ; and appropriate disclosure of various elements of capital. improving risk coverage of the basel ii framework 8. the crisis has exposed several flaws in the quantitative risk management models used by banks. one of the flaws is the inability of the models to capture the market risk in their trading book positions, particularly under stressed conditions. this is sought to be corrected by requiring that the capital calculations be made on parameters calibrated to stressed conditions. 9. the last decade witnessed a quantum jump in the derivatives activities of banks leading