areas would also give financial inclusion the much desired fillip. ours is a bank led model for financial inclusion because in our view only banks can provide a comprehensive inclusion programme – deposit and loan products and remittance facilities. hence banks bear very large responsibility in making the financial inclusion programme a success. ( ii ) infrastructure financing 29. india ’ s infrastructural financing needs are not only huge but also vital. the targeted annual spend on infrastructure during 2007 – 12 is about usd 500 bn which is estimated to double in the next five year plan ( usd 1 trillion during 2012 – 17 ). shortfall in infrastructure financing, according to an estimate, would cost about 4 % of gdp every year1 which is too costly for a growing country like india. banks, traditionally, have been the major source of infrastructure financing and their exposure to infrastructure is already high at 17 per cent. infrastructure projects involving long term funding plans have, however, severe implications for the asset liability management at banks. there are some alternatives to bank financing such as development of corporate bond markets, infrastructure debt funds etc. the challenge before banks in the fast evolving landscape is to realign their position in meeting the infrastructure finance needs, at the same time, however, not significantly increasing their risks. take - out financing could be one option in achieving this balancing act. government and rbi have recently come out with a structure for infrastructure debt funds ( idfs ) which would facilitate take - out financing, development of the corporate bond market etc. ( iii ) financing of housing and real estate 30. financing of housing and real estate is another challenging area for banks. with a high rate of population growth, coupled with increased urbanization and growing incomes, there is a tremendous business opportunity for banks to participate in this segment. the emergence of demand for housing finance is expected to be the key driver of bank credit in future. however, real estate, owing to its imperfection in terms of information asymmetry and opacity, poses great challenges and banks need to tread with utmost caution and should avoid falling prey to irrational exuberance. real estate is highly sensitive and prone to easy build up of bubbles, which could be mistaken for growth momentum. the global crisis bears a striking testimony to the disastrous impact the excesses in real estate sector could pose to the financial system and banks have to resist the lure of quick but risky returns. c. challenges in correcting the fault lines ( i ) asset quality 31. non - performing assets

. moreover, there are reputational issues too if large banks continue with standardized approaches. however, the implementation of the advanced approaches raises several issues relating to development of human resource skills, technology upgradation, branch interconnectivity, availability and management of historical data, robustness of risk management systems, etc. though rbi has set an indicative time schedule for implementation of the advanced approaches, banks ’ response has not been encouraging so far. it is high time for larger banks to seriously upgrade their systems and skill sets and migrate to the advanced approaches. ( ii ) migration to basel iii ( a ) capital 11. basel ii was designed because its predecessor i. e. basel i was considered risk insensitive and too preliminary to cope up with the rapid developments in the financial sector resulting in substantial regulatory arbitrage. the basic purpose of basel ii was to leverage on the risk management systems of internationally active banks and use that for enhanced risk management architecture and, in the process, have better measurement of capital requirements. it is ironical that when the crisis took place, basel ii was either not implemented or just implemented in the jurisdictions. and yet we have had to leapfrog and go in for enhancements under basel ii. 5 and basel iii. under basel iii, an assessment of indian banks in terms of capital requirements has revealed that, notwithstanding some issues with a few individual banks, the system, as a whole, is very well capitalized and the transition to the revised capital norms of overall capital adequacy, tier i component or equity component would be smooth. the stress point, however, would be that banks will be required to adjust the unamortized portion of pension and gratuity liabilities in the opening balance sheet on april 1, 2013 on transition to ifrs. 12. going forward, the capital requirement on account of increased coverage of risks would not be so material for indian banks as either those activities are not allowed ( i. e. re - securitisation ) or their magnitude is quite small ( i. e. trading book ). 13. however, capital requirements, including equity, would be substantial for supporting the high gdp growth and the fact that credit to gdp ratio, which is currently quite modest at about 55 per cent, is bound to increase substantially on account of structural changes in the economy i. e. financial inclusion program, increase in loan requirements from more credit intensive sectors such as manufacturing, infrastructure, etc. 14. the large