in this regard and observed that restructured accounts are classified as impaired if bis central bankers ’ speeches the restructuring ( i ) is on account of financial stress of the borrower or due to delays / non - payment as per contractual terms by the borrower ; and ( ii ) the modification of terms is non - commercial, i. e., disadvantageous to the lenders. the working group also observed that as per international accounting standards, loan accounts are generally treated as impaired on restructuring. it also noted that “ definition of default ” under the internal ratings based ( irb ) approach of basel ii for computation of capital requirement for credit risk, identified restructuring as an event of default irrespective of the asset classification. the working group also took note of the fact that the capital market and the rating agencies viewed any restructuring of an account as an event of impairment even if the regulators allowed the accounts to retain the “ standard ” asset classification status. therefore, the working group opined that for consistency, restructuring should be treated as an event of impairment or default and hence the account should be downgraded to sub - standard or npa category. the working group was conscious of the consequences of aligning our restructuring guidelines with this best practice at this juncture when the impact of global financial crisis is substantial and a new crisis in the form of european sovereign debt crisis is still unfolding. doing so immediately might act as a disincentive to banks to restructure viable accounts which could lead to substantial distress to the borrowers and increase in the non - performing assets and provision requirements for the banks. the working group, therefore, recommended that the asset classification benefit available on restructuring of advances be done away with, say, after a period of two years. banks are perhaps not happy with this recommendation, as observed from their comments. however, other stakeholders like print media, rating agencies and certain individual professionals have welcomed this recommendation. some comments in the newspapers have even advocated forthright implementation of this recommendation without waiting for two years. provisioning buffer the working group also estimated that a significant portion of restructured standard assets turn into npas subsequently as some of these accounts were ab - initio weak and the due - diligence carried out for viability studies were not proper. june 2012 financial stability report of the reserve bank estimated that 15 % of such loans may turn into npas while the working group took a more conservative view under a stressful scenario and estimated that 25 – 30 % of

currently among the highest in the world, but it has been financed almost entirely from domestic savings. there is a commitment to fiscal consolidation in the medium term with the implementation of the fiscal responsibility and budget management act, 2003. in the interim, however, before embarking on any faster pace of external financial liberalisation, the possible spill - over effects of fiscal deficits into external sector need to be carefully evaluated. second, it is widely recognised that financial instability can lead to high variability in real activity and, as the asian financial crisis has tellingly demonstrated, even cause interruptions in the growth process. financial distress has resulted in macroeconomic and welfare losses. resilience and flexibility in the real sector of the economy are essential to deal with surges of capital flows, large reversals and associated fluctuations in financial prices that become inevitable with accelerated liberalisation of financial sector. at present, some inflexibilities in pricing policies and restrictions on domestic trade constrain the response of the real sector. in general, therefore, low level of system flexibility at the current juncture is a major constraint on economic agents and financial market participants in responding to highly accelerated financial liberalisation and dealing with its downside risks. third, the adequacy of foreign exchange reserves is often cited as a consideration for significantly accelerating the pace of financial liberalisation. foreign exchange reserves are, in the final analysis, a cushion to withstand both cyclical and unanticipated shocks. therefore, reserve adequacy may be a necessary condition but not a sufficient one for speeding up financial liberalisation. there is a clearer recognition today that the net benefits from financial liberalisation in respect of any developing country would be enhanced only if complementary policies in non - financial sectors are followed. finally, the existing international financial architecture is not adequate to prevent or mitigate the domestic and external effects of financial crisis in large economies like india. the impact of instability in times of crisis appears largely to be borne by the home or domestic public sector rather than the global private sector. the issue of setting the pace of financial liberalisation revisits the issue of tradeoff between sustained growth and a growth rate that could potentially turn volatile and unstable. while it is necessary to add to the pace of growth, it is also equally important to minimise the risks of instability and experience shows that more than desirable pace of financial liberalisation was often followed by financial instability and crises. thus, the recent experience in many countries shows that periods of impressive