contain the pro - cyclicality of the financial sector. building capital buffers will entail additional costs for banks with consequent implications for investment and hence for overall growth. apart from the general concern in this regard, in india there is an additional concern about the variable used to calibrate the countercyclical capital buffer. credit to gdp ratio is put forward as a natural candidate for this calibration. it is not clear that this will be an appropriate indicator in the indian context. unlike in advanced economies where this ratio is stable, in emerging economies such as india, it will likely go up for structural reasons – enhanced credit intermediation owing to higher growth as well as efforts at deepening financial inclusion. however, the proposed framework is flexible enough to allow national discretion to suit the country situation in a “ comply or explain ” framework. in india, for instance, sectoral approaches to countercyclical policies have stood the test in the past and we could continue with such sectoral approaches. 9. to effectively deploy countercyclical measures, we also need to improve our capabilities to predict business cycles at the aggregate and sectoral levels, and identify them in real time. this will require better quality of economic and financial data as well as improved analytical capabilities. leverage 10. estimates show that the leverage in the indian banking system is quite moderate. notwithstanding the fact that the slr portfolio of our banks will be included in computing the leverage ratio, indian banks will not have a problem in meeting the leverage ratio requirement since the tier 1 capital of many indian banks is comfortable ( more than 9 % ) and their derivatives portfolios are also not very large. liquidity 11. the major challenge for indian banks in implementing the liquidity standards will be to develop the capability to collect the relevant data accurately and granularly. we do not have much experience to fall back on since our financial markets have not experienced the levels of stress that advanced country markets have. predicting the appropriate stress scenario is, therefore, going to be a complex judgment call. on the positive side, most of our banks follow a retail business model and their dependence on short term or overnight wholesale funding is limited. they also have a large amount of liquid assets which should enable them to meet the new standards. 12. there is an issue about the extent to which statutory holdings of slr should be reckoned in the estimation of the proposed liquidity ratios. an argument could be made that they should not be counted at

exit from the quantitative easing programme that has been in existence since 2008 has not had a very adverse impact on the rupee. however, notwithstanding the recent measures and policy buffers created since last year, it is highly likely that any reversal in the interest rate trend in the us would lead to flight of capital to the so - called “ source ” countries, in the process, putting pressure on the domestic currency of the emes. 19. the wild gyrations in the forex market has the potential to inflict significant stress in the books of indian companies who have borrowed abroad as was evident during the financial crisis. this stress eventually hampers their debt repayment capability to the domestic lenders as well. it is precisely with this consideration that rbi has been advocating bis central bankers ’ speeches a curb on the increasing tendency of the corporates to dollarize their debts without adequate mitigation. 20. our inspection of banks ’ books has highlighted need for the banks to have more robust policies for risk mitigation on account of un - hedged foreign currency exposure of corporate entities. inadequacies of data further complicate the impact assessment of such exposures across the banking system. the banks have been advised to factor in this risk into their policies / pricing decision and also devise means for sharing of information on such exposures amongst themselves. regulatory guidelines have also been since issued outlining the capital and provisioning requirements for exposure to entities with significant unhedged forex exposures. v ) corporate governance 21. another area which is a major challenge, especially in the psbs, is corporate governance. some of the recent headline events have shown the psbs in poor light. as a regulator and supervisor of banks, rbi has been putting a lot of emphasis on this aspect. the p j nayak committee appointed by rbi to review “ governance of boards of banks in india ” has made certain significant recommendations like splitting the post of chairman and managing director at psbs, giving fixed five - year tenures for these posts, professionalising the boards of psbs, etc. rbi is constantly engaging with the government for the early implementation of the committee ’ s recommendations. a related concern is the impending vacuum likely to be created in the public sector banks, especially in the middle management level, due to large - scale retirement of officers in next 2 – 3 years. on our part, we have been sensitizing the bank managements to address the likely talent deficit that they would have to