to more traditional bank lending. the wider use of internal ratings, coupled with greater transparency regarding their compilation and some assurance of quality control by the regulators, may in fact contribute to further'commoditisation'of bank loans. it is conceivable that this development could reduce the cost of due diligence on loan portfolios by rating agencies and buyers. and, in turn, it could mean a reduction in the costs of risk transfer through securitisation or credit derivatives, with beneficial effects on banks'balance sheets and liquidity. however for this to happen, banks'internal ratings will need to carry credibility in the market and, for this, transparency is essential. the transparency proposals from the basel committee have come under a certain amount of fire for their volume and detail. but i would like the critics to dwell for a moment on the alternative : a world in which banks effectively set their own capital, with no assurance of consistency or comparability from one bank to another. this is an important debate and we are keen to listen to others'views before the proposals are finalised. turning to the possible effect of basel on capital flows more generally, including bank lending, undoubtedly the new risk sensitivity will tend towards changing conditions for certain borrowers and issuers. this is particularly marked in the sovereign context, where, based on current ratings, approximately twenty seven sovereign borrowers will incur a lower bank capital charge versus eleven incurring a higher one. again i would stress that the cushion of capital which most banks maintain over and above their regulatory minimum will blur the impact of the basel changes, since in these circumstances banks'lending and pricing decisions will not be constrained by the regulatory standard. however, in some sense the basel proposals will have failed in their purpose unless the pricing of bank credit better reflects the riskiness of borrowers. by removing perverse incentives for banks, we also wish to establish better incentives for borrowers. greater risk sensitivity does, however, carry with it a possible danger, and that is the introduction of potential'procyclicality'into the capital framework. i have touched on this concern more than once in the past, and make no apology for doing so again. to counteract this danger, regulators should not allow banks'internal ratings to reflect the optimistic prospects of borrowers during an economic upswing : rather, ratings need to be genuinely forward - looking, and to factor in borrowers'likely performance during economic stress. long runs

security printing press at nasik had to go to work again until it could get better results that eventually passed muster with sir james. 11. i have recounted this story here not only because it is part of our history preserved in these archives, not only because it is interesting and funny, but also because many of our staff, especially those from the central office who observe me closely, find that i am fastidious about small things such as margins, formats, line spacing etc. many of them feel, perhaps rightly, that the governor should be spending his time and effort on more weighty concerns such as, for example, the menu of the staff cafeteria. the story of sir james and the seal is therefore a matter of comfort for me. it shows that some of my illustrious predecessors were equally fastidious, admittedly about more important things. hopefully, future generations will appreciate my fastidiousness even if the current staff think i am a nuisance. 12. the history of rbi over the past 75 years is indeed replete with such interesting events and developments. these archives tell many of those stories and they include extracts from the report of the edward young commission recommending the establishment of a central bank for india to be named reserve bank of india, the congratulatory telegram dated 1st april 1935 from the viceroy of india to the rbi governor on the commencement of operations of the reserve bank of india, the draft of rbi bill 1934, the minutes and photograph of the first meeting of the central board of directors, the design of currency notes and the weights earlier used for weighing coins and gold, a letter from our first prime minister pandit nehru to sir c. d. deshmukh, the first indian governor of the reserve bank, requesting him to send an analytical report on the deteriorating economic condition and suggest remedial measures, a letter from prime minister indira gandhi requesting release of foreign exchange for her son rajiv ’ s studies abroad, the reasons for closure of the rbi office in london and the devaluation of the rupee in 1966. 13. the archives also contain important records that predate the establishment of the rbi. for example, the rbi archives preserves the cancelled securities and bonds of the east india company and the government of india pertaining to the period 1777 – 1894. records such as these capture the economic situation of the time and are of great historical significance. 14. established in august 1981, the reserve bank archives were among the earliest corporate archives in the country