##erabilities. in this case, banks became dependent on shortterm funding from overseas, rather than their traditional domestic deposit base. when investors re - trenched, that funding dried up and banks struggled to find viable alternative sources of funding. ensuring gross capital flows are not excessive is just as important as avoiding excessive net capital flows. moving to a sustainable equilibrium requires a narrowing in the international payments imbalances. and we have indeed seen such a narrowing since the start of the crisis. for instance, the international monetary fund ( imf ) expects a current account deficit in the united states of just under 3 % of gdp this year, while the chinese surplus is expected to have fallen to around 2½ % of gdp. but, as with the euro area, the crucial question is how much of this narrowing is simply a reflection of the cyclical weakness in the deficit economies or whether it represents a more durable shift in the pattern of demand in both deficit and surplus economies. if it is down to the former, then the imbalances can be expected to reemerge as recovery proceeds. the answer to this question depends very much on the degree to which the substantial shortfall, relative to pre - crisis trends, of activity in the deficit economies represents a permanent impairment of supply potential as a result of the financial crisis and subsequent recession, or whether it will ultimately be reversed. successive inflation reports and speeches by several mpc members 6 have addressed this issue in the context of the united kingdom, and i think it is fair to say that the evidence is presently inconclusive. chart 11 provides an assessment, drawing on imf analysis, of the evolution of structural deficits and surpluses for two alternative scenarios, with the red dashed line corresponding to an assumption that supply impairment in the advanced economies as a result of the crisis is minimal ( and therefore output gaps are correspondingly large ), whereas the blue dashed line – which corresponds to the imf ’ s central case – assumes a relatively high degree of supply impairment ( and therefore substantially smaller output gaps ). in the former case, the bulk of the post - crisis narrowing in imbalances is attributed to cyclical factors, whereas in the latter they are attributed to structural factors. clearly, depending how one reads the data, one can arrive at a different conclusion. an alternative way into this is to look at what has happened to relative prices, rather than quantities. a natural counterpart of a rotation in demand from the advanced to the emerging world should be

expansion of commercial bank credit than the quota - slab system. the nlr formula envisaged using a variant of the statutory liquidity ratio to regulate the cost of the bank ’ s loans to scheduled commercial banks. 14. the credit authorisation scheme as an instrument of credit control was introduced in november 1965 to align credit policies closely with the five year plans. under the scheme, scheduled commercial banks were required to obtain the reserve bank ’ s authorisation before sanctioning any fresh credit of rs. 1 crore or above to any one borrower or any fresh limit which would take the total limits engaged by the borrowers from the entire banking system to rs. 1 crore. this scheme helped in preventing the problem of pre - emption of scarce bank reserves by a few large borrowers and enforcing a measure of financial discipline on them. 15. as is evident from the above, in the initial phase of scarce credit, reserve bank used credit management techniques to ensure efficacious use of credit. in the recent years, credit management measures have been used to discourage excessive risk build - up in a sector. in view of significant rise in bank credit to the commercial real estate sector in conjunction with that in the prices of real estate, risk weights for banks ’ exposure to commercial real estate were increased from 100 per cent to 125 per cent in july 2005, and further to 150 per cent in may 2006. the risk weights on housing loans extended by banks to individuals, were also increased from 50 to 75 per cent in december 2004. the provisions for standard assets were also revised upwards progressively in november 2005, may 2006 and january 2007, in view of the high credit growth in select sectors. these measures stood us in good stead during the global financial crisis. thus reserve bank in pursuance of the objective outlined in the rbi act has been diligently monitoring the flow of credit in the economy and taking appropriate steps to ensure that flow of credit is used to the betterment of the economy. regulation of non - banking financial sector 16. the idea that shadow banking should be regulated is of recent origin in most of the countries and has found credence in the aftermath of the global financial crisis when the role of shadow banks was brought in sharp focus. however, in india, the scheme of regulation of non - banking financial companies ( nbfcs ) originated in mid - sixties when sudden upsurge in deposit mobilisation by non - banking companies was noticed. the provisions of chapter iii b