trend that began in the 1970s, when reserves were first reallocated from us treasury bills to bank deposits, reserve managers have been gradually shifting into higher - yielding, higher - risk instruments. they seem most comfortable managing market risk but are beginning to take on more credit and liquidity risk too. the currency composition of their portfolios, while volatile, has not changed as much as the instrument composition. " it is essential to recognise that reserve managers are already shifting into higher - yielding instruments with a higher risk - return equation, presumably as a result of progressively rising level of reserves. consequently, the financial returns on the free reserves at the margin could be far higher than the average return. in my view, the marginal return appears to be a more relevant concept in the context of alternative forms of investment of reserves. ( v ) quasi reserves with the positive shock emanating from large capital flows resulting in significant reserves accumulation in many emes, a new development in reserve management is to hold a part of the reserves which could be used by the public sector in a country in a manner different from the strictly defined pattern of holding of the external assets by the monetary authorities. such foreign exchange reserves could be termed as quasi reserves. in terms of its holding, such quasi reserves could be easily retrievable when the situation demands. in singapore, the monetary authority of singapore ( mas ) and the government of singapore investment corporation ( gic ) basically manage foreign exchange reserves. gic is the government ’ s principal investment agent, handling the bulk of the nation ’ s investments while the mas holds reserves to maintain the stability of the singapore dollar. similarly, temasek holdings invests in singapore as well as manages diversified global portfolio with the aim of creating and maximising sustainable value for the shareholders and providing resources to finance pension and other benefits. on the pattern of the singapore's gic, south korea has recently established the korean investment corporation ( kic ). another interesting example is china, where foreign exchange reserves have been utilised to strengthen the banking system without foreign securities being sold. china has transferred funds from its international reserves, held with the peoples ’ bank of china ( pbc ) to a new company, central huijin investment company ( chic ), set up in 2003 and jointly managed by the government, pbc and the state administration of foreign exchange. in the pbc's balance sheet, the said amount of reserves was replaced by claims on the chic. the chic

evolved as a mix of various independent functions. thus we have credit functions as a separate activity, deposit taking as another different function, a host of payment facilities - each as a distinct activity, other services and so on. it is now time to look at consolidation of all these inter - related functions. technology has already provided an answer in the form of total branch automation, which has now given way to the core banking systems, and the facility of single - window service at branches. while this traditional approach towards consolidation may be ensuring that the customers of today are retained by a bank, the growth of new clientele will, however, be related to other progressive measures to be taken by banks. an outward looking consolidation holds the key. consolidation of all types of financial services which a customer of a bank may require needs to be offered by banks. while some steps have been taken by banks in the form of universal banking and the offering of related financial services such as insurance, tax advice, securities market operations, depository functions and the like, the future may witness alliances with service providers who may in today ’ s context appear to have to relationship with traditional banking concepts. for example, a mobile phone user, who is a customer of particular telecommunication service provider, may switch preferences to another bank if the phone company does not link its services to that of a particular bank with whom the user is banking with. thus strategic alliances with varied service providers may become a necessity. the next major challenge arises out of the forces of competition. traditional concepts relating to competition from other players in the same line of business will indeed exist but these will pale into oblivion in the form of competition from hitherto unexplored and unanticipated areas. easy finance schemes by retailers of consumer durable articles will obviate the need for short term loams by customers of banks, thus resulting in a dwindling retail loan portfolio. banks can overcome this challenge by providing refinance to the retailer who would be in requirement of funds for improving his business turnover portfolio. the essence of this is that competition may have to be exploited as an opportunity. planning for the unanticipated and looking for opportunities hold the key to the successful bank of the future. in this connection, i draw your attention to the report of the rbi group on rural credit and microfinance and suggest that banks which are first movers would stand to gain substantially in terms of expanding their retail portfolio. technology implementation comes with its attendant requirements