that all foreign banks operating in india and indian banks having a presence outside india should migrate to basel ii by march 31, 2008 and all other scheduled commercial banks encouraged to migrate to basel ii in alignment with them but not later than march 31, 2009. in addition to the exercise of normal prudential requirements on banks, the reserve bank has also successively imposed additional prudential measures in respect of exposures to particular sectors, akin to a policy of dynamic provisioning. for example, in view of the accelerated exposure observed to the real estate sector, banks were advised to put in place a proper risk management system to contain the risks involved. banks were advised to formulate specific policies covering exposure limits, collaterals to be considered, margins to be kept, sanctioning authority / level and sector to be financed. in view of the rapid increase in loans to the real estate sector raising concerns about asset quality and the potential systemic risks posed by such exposure, the risk weight on banks'exposure to commercial real estate was increased from 100 per cent to 125 per cent in july 2005 and further to 150 per cent in april 2006. the risk weight on housing loans extended by banks to individuals against mortgage of housing properties and investments in mortgage backed securities ( mbs ) of housing finance companies ( hfcs ) was increased from 50 per cent to 75 per cent in december 2004, though this was later reduced to 50 per cent for lower value loans. similarly, in light of the strong growth of consumer credit and the volatility in the capital markets, it was felt that the quality of lending could suffer during the phase of rapid expansion. hence, as a counter cyclical measure, the reserve bank increased the risk weight for consumer credit and capital market exposures from 100 per cent to 125 per cent. 2 an additional feature of recent prudential actions by the reserve bank relate to the tightening of regulation and supervision of non - banking financial companies ( nbfcs ), so that regulatory arbitrage between these companies and the banking system is minimized. the overarching principle is that banks should not use an nbfc as a delivery vehicle for seeking regulatory arbitrage opportunities or to circumvent bank regulation ( s ) and that the activities of nbfcs do not undermine banking regulations. thus, capital adequacy ratios and prudential limits to single / group exposures in the case of nbfcs have been progressively brought nearer to those applicable to banks. the regulatory

? probably going ahead non - financial companies may think of some kind of stress tests to assess their resilience to emerging risks, similar to the approach adopted by financial sector industry, subsequent to the gfc. risks of unhedged forex exposures large scale unhedged foreign currency exposures are not only a threat for individual entities but also a concern to the economic and financial system stability. while regulators certainly will not like to micro manage what otherwise is a commercial decision, corporates need to take care of the potential risks embedded in their unhedged currency exposures since they might incur significant costs due to unexpected and sudden exchange rate movements. you all might be aware of the recent decision of the swiss national bank that claimed a few scalps while the victims cried foul. on the other hand, as governor rajan had indicated some time back, 4 borrowers get into a trap at times of exchange rate appreciation which gives them a false sense of complacency in terms of having higher equity due to rising asset prices. while we do have comfortable foreign exchange reserves, there is a strong view that no amount of such reserves can cushion extreme external shocks. that too here we are talking about nations. you can saving credit – talk by dr. raghuram g. rajan at the third dr. verghese kurien memorial lecture at irma, anand on november 25, 2004. competitive monetary easing : is it yesterday once more? – remarks by dr. raghuram g. rajan at the brookings institution, april 10, 2014. bis central bankers ’ speeches imagine how vulnerable corporates can become if they have too much of foreign currency exposures. for those business entities that do not have a natural hedge, mere cost advantage in terms of pure interest rate differential ( without the hedge costs ) should not be the guiding factor for overseas borrowing. on the other hand, we also had this unpleasant experience, in the aftermath of the financial crisis of 2008, when many indian exporters who had entered into complex derivative structures with banks suffering severe losses arising out of marking to market of their derivative positions. this is why i said earlier that complexity benefits some and hurts others. hence corporates need to understand not only the risks they are assuming but also the risks arising out of faulty “ risk mitigation ” processes. people in business should therefore realise that adoption of risk management strategies is not meant for generating additional earnings but is needed for protection of the projected income flows. last