are being scaled down as can be seen from slr reduction from peak levels of 38. 5 per cent of ndtl of banking system to the present level of 22 per cent. 32. while theoretical formulations can conjecture conflicts of interest ; the validity of assumptions need to be tested by evaluation of experience / performance and on that count, conflict of interest cannot be established with regard to reserve bank. 33. another point that merits attention is that the proponents of separation, while citing examples from countries which differ significantly with regard to institutional milieu from india, pay little attention to nuances of debt management operations. for instance, domestic debt in the uk is managed by dmo, whereas external debt is the responsibility of the bank of england. the whole concept of an “ all - in - one debt office ” is a theoretical construct than a real organisation. 34. it is also important to note that sovereign debt management ( sdm ) is much more than a mere resource raising exercise especially in a developing country context like ours. the size and dynamics of government market borrowing has a much wider influence on interest rate movements, systemic liquidity. an autonomous dmo, driven by specific objectives exclusively focusing on debt management alone, may not be able to manage this complex task involving various trade - offs. bis central bankers ’ speeches 35. with regard to autonomous dmos focusing on specific responsibilities, the experience of european debt managers is instructive. the experience of dmo in the euro area ( especially greece, portugal and ireland ) has been less than satisfactory. the independent dmos seemed to have been guided by perverse incentives and issued short - term / foreign debt in a disproportionate fashion, intensifying roll - over risk, sovereign risk and financial instability. the debt management strategy and operations have resulted in a skewed maturity profile with balloon payments. for instance, greece has bunched maturities during 2010 – 19 with interest payments on public debt constituting nearly 40 per cent of greece ’ s budget deficit during 2009. large proportion ( above 70 per cent ) of debt of portugal, greece and ireland was held by non - residents. as foreign investors turned risk averse and started withdrawing investments, rating agencies downgraded the debt of these countries. the debt management strategy has jeopardized the fiscal situation and financial stability. therefore, autonomous dmo focusing on specific objectives, such as, cost minimisation in isolation and not in conjunction with other macro - economic policies may

residential mortgage and 125 % for personal loans. these are hard decisions which we, as a regulator, have taken with a view to capturing the true level of underlying risk knowing fully well that this might cast a burden on the banks in india. d ) internal capital adequacy assessment process the internal capital adequacy assessment process which forms an important element of pillar ii is an integral and important part of the basel ii framework. yet, some doubts are being raised with regard to its relevance for banks adopting standardised approach and basic indicator approach. i would like to mention here that though pillar ii is not a formal part of basel i framework, the reserve bank has been discharging some of the pillar ii responsibilities even under the current framework. the basel ii framework takes this a step forward by making it a formal requirement. the additional element which casts some formal responsibility on the banks under the new framework is that banks are required to put in place an effective internal capital adequacy assessment process ( icaap ) which should not only address the 3 major risks ( viz. credit risk, market risk, and operational risk ) but also other risks for which explicit capital has not been prescribed under pillar i. further, banks are also required to address suitably other dimensions of the three pillar i risks. a professionally managed bank would suo moto strive to plan for and achieve most efficient use of capital even if there were no formal regulatory requirement. the icaap merely attempts to formalise these efforts of bank managements as a part of the capital adequacy framework. i am sure this would clarify the relevance of including icaap as an integral part of pillar ii. e ) stress testing stress testing has become an integral part of banks ’ risk management systems and is used to evaluate their potential vulnerability to certain unlikely but plausible events or movements in financial variables. the supervisory review process under pillar 2 of basel ii framework is intended not only to ensure that banks have adequate capital to support all the risks in their business, but also to encourage banks to develop and use better risk management techniques in monitoring and managing their risks. banks must demonstrate, under the internal capital adequacy assessment process prescribed by pillar 2, that they have enough capital to not only meet the minimum capital requirements but also to withstand a range of severe but plausible shocks. in the above background, the need for banks in india to adopt ‘ stress tests ’ as a risk management tool has been emphasised in the annual