in figure 9. 2 where the debt service ratio for a typical new borrower ( with a 20 percent deposit ) is projected to rise more sharply, relative to the interest rate track, than in the previous cycle. 10. financial policy perspective the reserve bank ’ s concerns expressed through last year, and motivating the lvr restrictions introduced in october, related to financial stability risks arising from highly geared house purchases at potentially unsustainable prices. the high lvr lending through that period was increasing the likelihood of a house price correction by pushing house prices higher, and also increasing the vulnerability of banks to such a correction. as discussed earlier, the lvr restrictions have had a moderating effect on the housing market as well as reducing the proportion of high lvr loans in bank balance sheets. we believe that the lvr policy is achieving its purpose of improving the safety of the financial system. the market overall is less vulnerable to the effects of an adverse shock – from international financial markets for example. and banks are now less exposed to potential credit losses as the interest rate cycle turns upwards. nevertheless, there remain a significant volume of high lvr loans on bank balance sheets – in the order of 20 percent – and, as seen in figure 9. 2, debt service ratios are likely to increase substantially over the coming two years. this could put some stress on highlyleveraged borrowers and their lending institutions. we have stated clearly that the lvrs are temporary restrictions and will be eased or removed when housing market pressures have abated and when we are confident that a resurgence of high lvr lending will not occur following removal. the lvrs are supporting monetary policy but they will have a reduced effect over time. also, the efficiency costs of such restrictions will tend to increase the longer they are kept in place. before removing the lvrs, however, we will want to be confident that the housing market is responding to interest rate increases ; and that immigration pressures are not causing a resurgence of house price pressures. it will take some time to gain this assurance. at this stage we consider the earliest date for beginning to remove lvrs is likely to be late in the year. 11. conclusion housing market and credit cycles are part of the economic landscape and, although they can be moderated through sound policy, they cannot be eliminated. when pressures become excessive the cycle can be damaging for the financial system and for the broader economy. this is why we monitor housing closely and why housing is

seamless transfers across banks using the new payment products driven by technology. whenever the issue of technology led financial inclusion is flagged, a debate often ensues as to whether the model for inclusive development should look beyond the formal banking channels insofar as it relates to money transfers / payments. we have studied the experience of philippines and kenya in this regard. we believe that providing payments services alone is not financial inclusion as there is need for other products as well. given that india is still far from being a cash - less society, the cash - in / cash - out arrangements in these models play an important part in scaling up. it is important to note that the high level inter - ministerial group anchored by the department of information technology, government of india that went into the issue, after extensive discussions on the various issues involved, has reached more or less the same conclusion i. e. to proceed with a bank led model. it is, therefore, essential that banks and mobile / card operators work together as partners in achieving the objective of a ubiquitous and efficient payments system. savings bank interest rate – case for deregulation? 5. given the level of interest rates on bank deposits, common persons are lured by higher interest provided by alternate channels especially in the informal markets. the deregulation of savings bank interest that is currently set at 3. 5 per cent by rbi is an issue which is on our radar. a working group is being set up to debate the issues and draw conclusions. on one hand, the low cost savings accounts provide banks with low cost funds of an enduring nature which facilitate alm and help lower lending rates. on the other hand, the costs not currently recovered in handling such accounts have to be considered as well. totally freeing rates could, in situations where there is virtual monopoly of banking, lead to lowering rates in some areas while leading to increase in other areas – it would need to be ensured that there is no discrimination between different customers of the same bank. transparency in cost recovery could facilitate deregulation – this would also need to be nondiscriminatory across locations. an important consideration should be whether deregulation of savings rates would draw more population into the fold of formal banking system. all these issues will be gone into in detail by the working group. capital needs of banks to support inclusive growth 6. a major factor that will determine banks ability to facilitate high growth will be their ability to garner capital. over the last 5 years, banks have been