disadvantages the vulnerable groups with low bargaining power such as pensioners, housewives, students etc. it generates social disharmony and social tensions. • inflation also raises the costs of local enterprises by raising the prices of inputs and wages. this would adversely affect a country ’ s comparative advantage. • similarly, inflation also puts further pressure on the government budget by raising current expenditure due to increases in the prices of inputs and the salaries of employees. it also causes the revenue to fall behind the increases in the national income. therefore, the use of inflation as a measure for funding government budgets is not an advisable strategy for any government. this was very cogently expressed by dr. goh keng swee, economic pundit behind singapore ’ s economic miracle, in his reminiscences of why singapore chose to retain the currency board system, as follows : “ financing budget deficits through central bank credit creation appeared to us as an invitation to disaster. there was no effective way of exchange control in an open trading economy like ours to deal with inevitable balance of payments troubles. … … the way to better life was through hard work, first in schools, then in universities or polytechnics and then on the job in the work place. diligence, education and skills will create wealth, not central bank credit. ” there is no better explanation of the evils of inflation tax than the above statement of wisdom. countries which did not have this wisdom fell through the line and were gripped by uncontrollable hyper - inflation in their economies. the most recent example is zimbabwe where inflation presently runs at mo re than 3700 % p. a. its central bank governor, mr. gideon gono, recently lamented by equating his country ’ s hyper - inflation to an economic hiv, an epidemic that would kill people on a mass scale. hence, using inflation to fund budgets is just like getting a demon to work for you.

your credit decision is seriously flawed and sooner or later will translate itself into npa. why do we have high levels of npa? is the information necessary for evaluation of creditworthiness of a borrower available to the banks? is the credit decision taken on the basis of such evaluation - how current is the financial information on the borrower with the bank? the market is a dynamic place, where change takes place all the time. it is imperative that credit officers of banks be given maximum exposure to the real sector - the numbers in financial statements must have a direct relationship to the real sector to reflect the current status of the borrower ’ s business? they should support the repayment programme undertaken by the borrower on which the bank ’ s credit decision was predicated. you will see thus that information is critical to risk management without which you are groping in the dark and before long you will be faced with large losses. the emphasis should therefore be on the early identification of risk, which if addressed at the very initial stages, would not expose the bank to large scale losses at a later stage. effective credit risk management is the key to the health of the banking industry today. it is not the resolution of npa but the cause of npa that should be addressed. internal rating systems must be developed to afford an accurate and continuous picture of the level of risk exposure of the bank to individual credit risk so that timely action can be taken to soften the risk. management information systems must be strengthened. preventive and remedial actions should encompass additional capital, better internal controls and / or safer provisioning policies. capital is not a substitute for sound risk management. an operating environment based on prudent risk management rather than aggressive risk taking, gives us regulators comfort that profits are conservatively stated. this is the essence of prudence which underpins safe and sound banking. in an increasing trend to harmonise prudential frameworks across the globe, in recognition of the fact that banks, wherever they may be domiciled, are exposed to the same risks, it is becoming increasingly difficult to pursue country - specific solutions. we recognize that we too have to be internationally compatible in adopting common standards for regulation and supervision which are spearheaded by the basel committee. global financial reporting practices are not far away and there are efforts underway to establish a common set of internationally accepted financial reporting standards. differences of opinion between standard setters and regulators need to be reconciled ias 39 is one such which is