classify the investment portfolio based on intention and objective of holding the financial asset ( the business model ) and the contractual cash flow characteristics of such assets. further, the categorisation of an asset between banking book and trading book can have significant capital implications. these aspects shall require extensive use of management judgement. we expect the auditors to carefully understand the regulations and ensure that banks comply not only with regulations but also regulatory intent. the second example is that of expected credit loss ( ecl ) based provisioning norms. this is a work - in - progress at this point in time. we have issued a discussion paper ( dp ) and an external working group was also set up to get independent inputs on the significant transitions involved. an important aspect of the proposed ecl framework is that, within the broad framework prescribed by rbi, banks can use different methodologies and models for estimating loan loss provisions. this will present an unique challenge to both regulators and auditors. as statutory auditors, you would be required to satisfy yourself that the bank is accurately computing such provisions and the models employed by the regulated entities are robust. 2 / 5 bis - central bankers'speeches the principle based approach to regulations is founded on the belief that financial reporting reflects the economic reality of a transaction. however, application of principlebased standards requires significant use of management judgement. sometimes, management may choose accounting estimates which may lack neutrality or freedom from bias. it is in this context that building greater rigor and skepticism into the audit becomes necessary. doing that, however, may require special skills and it would be prudent to start working on building additional capacity to handle these changes and challenges. in this connection, let me also share our experience with implementation of such principle - based guidelines in nbfcs with respect to ind as implementation. our assessment shows that the flexibility offered by the principles - based standards, while valuable, has fallen short in some cases where their application is concerned. let me highlight certain issues and challenges which we have encountered and which could have been evaluated by auditors more carefully. while the standards allow sale from assets under amortised cost category, an entity needs to assess how such sales are consistent with the objective of collecting contractual cash flows. in practice, we have observed that there have been significant sales from amortised cost category by way of securitisation and direct transfers. it is not clear how such sales are consistent with business model whose objective is to hold assets in order to collect

marshall, “ we might as reasonably dispute whether it is the upper or the lower blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. it is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second ; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens ( marshall [ 1890 ] 1997, 290 ). ” 8. the exchange rate is a key macro - economic variable. it shapes a country ’ s balance of payments and engagement with the rest of the world. it affects a country ’ s export competiveness, of course in conjunction with other factors and its income and employment to bis central bankers ’ speeches the extent that export sector is important for the economy. it determines the cost of import and to the extent that import constitutes articles essential for investment and growth, can act as a retarding factor. it affects the price level through the linkages provided by the tradeable sector. 9. as we have seen earlier foreign currency behaves like a financial asset. the prices of all financial assets are forward looking and are based on the expectation of the future state of the world. as such a country can face large capital inflows or outflows depending on whether its future is perceived to be promising or discouraging. this in turn can affect the exchange rate which may not be in consonance with the fundamentals of the real economy for example the appreciation of the rupee in 2007 – 08 was caused by large capital inflows attracted by a buoyant and promising economy but affected the export sector adversely. the reverse was perhaps the case in the east asian crisis. the capital flows also pose challenge for the monetary policy setting. i allude to the much discussed mundell - fleming trilemma, i. e., it is impossible to have an open capital account independent monetary policy and fixed exchange rate. capital account openness and independent monetary policy framework could lead to flexible exchange rate which can be disorderly and volatile. 10. the reason i am discussing these issues in some detail is to emphasise the criticality of the exchange rate. the importance of exchange rate cannot be over emphasised for developing countries. for instance, it has got