that all deductions are to be adjusted against equity which hitherto were distributed equally between tier i and ii. the quantitative impact study published in december 2010 by bcbs of 91 large banks ( including 3 from india ) showed a shortfall of euro 165 bn and euro 577 bn in equity component vis - a - vis 4. 5 per cent and 7 per cent ratios, respectively. this is one of the reasons for an extended timeframe for implementation of basel iii from january 1, 2013 to january 1, 2019. the other reason is to cushion the slowdown in the gdp growth during the transition period on account of much larger capital requirements. according to a study conducted by the macroeconomic assessment group ( mag ), a group of modelling experts formed by the fsb and bcbs, while banks may attempt to raise lending rates and reduce credit growth during transition to higher capital levels, this is likely to have a modest impact on the real economy. the maximum decline in gdp over baseline forecast would be 0. 22 per cent after 35 quarters ( 0. 03 per cent per annum while the additional capital is being built up ) followed by gdp recovery towards trend path. longer transition period would result in lower costs because, banks will get longer time to build up capital from internal generation and thus there will be a less need to cut back on lending or to raise fresh capital from the market. the private sector estimate done by institute of international finance ( iif ) is, however, much higher. as regards india, our estimate is that transition at system level would not be much of an issue as all capital ratios currently are above the minimum requirement of basel iii though a few banks may come under pressure. moreover, the capital requirement on account of increased coverage of risks would not be so material for indian banks as either those activities are not allowed ( i. e. resecuritisation ), or their magnitude is quite small ( i. e. trading book ). the stress point, however, would be that banks will be required to adjust the unamortised portion of pension and gratuity liabilities in the opening balance sheet on april 1, 2013 on transition to ifrs. however, going forward, the capital requirements including equity are likely to be substantial for supporting the high gdp growth and the fact that credit to gdp ratio, which is currently quite modest at about 55 per cent, is bound to increase substantially on account of structural changes in the economy i. e., financial

of sophisticated risk management systems well integrated into the banks ’ business processes, the prerequisites of which are upgradation of technological systems and availability of appropriate skill sets. further, non - adoption of advanced approaches may have reputational issues for larger banks. therefore, it is time for larger banks to seriously consider upgrading their systems and migrating to advanced approaches. as regards technology, the implementation of core banking solutions ( cbs ) provides a platform for augmenting technology to enable real time mis and data analytics. the reserve bank ’ s it vision document for the period 2011 – 17, sets the goal and path towards these, among others. adoption of advanced approaches requires simultaneous use of the underlying processes in the day - to - day risk management of banks. as regards skills, public sector banks may find it particularly challenging to recruit / hire highly skilled people from outside or to retain their own officers who become highly skilled through training. skill requirements present another set of challenges : since the high end skills would remain confined to a small number of people ( quants, as they are called ), if the senior management and / or the board are totally unequipped, there would be inadequate oversight and the institutions may end up carrying higher risks. our dilemma is whether to let the larger banks first develop the required systems at their own pace or to nudge them by moral suasion or regulatory mandate which will require them to move to more robust technology and risk management systems at a faster pace and facilitate their early adoption of advanced approaches. iii. information asymmetry information asymmetry between banks and borrowers is an accepted fact. this problem becomes more acute in a multiple banking scenario. the way out is a robust system of pooling and exchanging of credit information through the mechanism of credit information companies ( cics ). lack of full information about a borrower can lead to over - financing and statutory liquidity ratio ( slr ) is the requirement on the banks in india to maintain a stipulated proportion ( currently 24 per cent ) of their total net demand and time liabilities in assets such as cash, gold or unencumbered, specified government securities bis central bankers ’ speeches diversion of funds, etc. having implications for asset quality. in fact, this was one of the issues in the recent past in the context of forex derivative transactions. till recently, we had only credit information bureau ( india ) limited ( cibil ), but the information asymmetry has continued on account of banks not