, banks will also be required to draw up their strategies for meeting the capital requirement arising out of implementation of basel 2. banks have been until now tapping the traditional instruments eligible for capital status, namely equity shares and subordinated debt instruments. the present legal framework does not allow all banks to raise capital through issue of preference shares. there are also certain restrictions on the maximum tenure of preference shares. this not only gives rise to an uneven playing field but also raises issues pertaining to the eligibility of redeemable preference shares for capital status, especially with regard to inclusion under tier i or tier ii. in view of the above uncertainties this has been a largely untapped source of capital in india. with a view to enabling banks to tap this source the reserve bank is examining the amendment of the existing legislation. through proper structuring, preference capital may be made attractive to meet the needs of a section of investors. we need to explore carefully this option as also the raising of capital through other hybrid instruments defined under the basel guidelines, so as to address the requirements of capital by the banking sector in india. this brings me to consolidation in the banking sector. as you are aware, the first narasimham committee had recommended consolidation in the indian banking sector whereby we would have a few internationally active banks, a few national banks and the others would remain regional banks. it was also clarified that the mergers should be based on synergies and locational and business specific complementarities of the concerned institutions and must obviously make sound commercial sense. mergers of public sector banks should emanate from the managements of banks with the government as the common shareholder playing a supportive role. in this background, the implementation of basel 2 could trigger a round of consolidation in the banking sector. it is difficult to foresee the precise pattern of consolidation which is likely to be triggered with the implementation of basel 2 in india. as we have seen in the past, in any merger integrating the manpower and culture of the taken over bank with the manpower and culture of the host bank proves to be a great challenge. it is only when integration in these aspects is achieved successfully that the merged entities would be able to capitalise on the synergies. hence, while the consolidation moves would be triggered by market forces, it will be necessary to ensure that mergers are successful in all respects, including manpower and cultural aspects, which are unique in the indian context. smaller localised banks might nonetheless still have a relevant role even on a

in the resolution process and minimization of cost. guidelines on uniform accounting standards for scs / rcs has been issued for reckoning acquisition cost, revenue recognition, valuation of srs, etc. to induce transparency in the books of scs / rcs. norms for calculation of management fee has also been rationalised. management fee will now have to be based on the net asset value of the srs rather than the outstanding srs issued 24. with these regulatory changes, scs / rcs will need to focus on actual redeeming of security receipts as it is no longer possible for them to base their profit model on the basis of management fees. in the near term, scs / rcs may find it difficult to align their pricing to the expectations of the selling banks and the selling banks also may not have yet reconciled to a realistic sale price expectation for the assets that they want to offload, resulting in the reduction in sales. the rationale behind these regulatory changes was to incentivise the process of recoveries / restructuring, as net asset values of srs is calculated on the basis of the likely rate of recovery of stressed assets. 25. the rbi has also advised that the banks using auction process for sale of npas to arcs should be more transparent, including disclosure of the reserve price specifying bis central bankers ’ speeches clauses for non - acceptance of bids, etc. if a bid received is above the reserve price and also fulfils the other conditions specified, acceptance of that bid would be mandatory. 26. it is expected that these amendments to the regulations will improve recovery prospect for scs / rcs. membership of jlf, lower threshold for consent to enforce the sarfaesi act, more time set to conduct due diligence and greater disclosures will enhance transparency and lead to better resolution of npas. it would also result in lower vintage of npas being sold by banks and quicker debt aggregation. npa management – new thoughts 27. let me now share with you some of the thoughts we have been discussing on npa management. enhancing credit appraisal capacity 28. one of the fundamental issues that hampers npa management is the inadequacies in the credit appraisal capacity of banks, more specifically on project appraisal. as we know, there is just one technical consultancy firm, besides some specific desks in some banks. with the requirement of independent evaluation for jlfs and the number of j