proposals will be issued in 2008 to : • raise basel ii capital requirements for certain complex structured credit products ; • introduce additional capital charges for default and event risk in the trading books of banks and securities firms ; • strengthen the capital treatment of liquidity facilities to off - balance sheet conduits. changes will be implemented over time to avoid exacerbating short - term stress. ( ii ) liquidity : supervisory guidance will be issued by july 2008 for the supervision and management of liquidity risks. ( iii ) oversight of risk management : guidance for supervisory reviews under basel ii will be developed that will : • strengthen oversight of banks'identification and management of firm - wide risks ; • strengthen oversight of banks'stress testing practices for risk management and capital planning purposes ; • require banks to soundly manage and report off - balance sheet exposures ; supervisors will use basel ii to ensure banks'risk management, capital buffers and estimates of potential credit losses are appropriately forward looking. ( iv ) over - the - counter derivatives : authorities will encourage market participants to act promptly to ensure that the settlement, legal and operational infrastructure for over - the - counter derivatives is sound. the road - map for the implementation of basel ii in india has been designed to suit the country - specific conditions. the phased implementation process got underway with the basel ii accord being made applicable to foreign banks operating in india and indian banks having operational presence outside india with effect from march 31, 2008. all other commercial banks ( except local area banks and rrbs ) are encouraged to migrate to basel ii in alignment with them but in any case not later than march 31, 2009. the process of implementation is being monitored on an on - going basis for calibration and fine - tuning. the minimum capital to risk - weighted asset ratio ( crar ) in india is placed at 9 per cent, one percentage point above the basel ii requirement. further, regular monitoring of banks'exposure to sensitive sectors and their liquidity position is also undertaken. in india, offbalance sheet vehicles in the form of spvs for the purpose of securitisation are in existence for which extensive guidelines, in line with the international best practices, have already been issued. liquidity facilities to such spvs are subject to capital charge. banks have been required to put in place appropriate stress test policies and relevant stress test frameworks for various risk factors by march 31, 2008. in order to further strengthen capital requirements, the credit conversion factors, risk weights and

that all foreign banks operating in india and indian banks having a presence outside india should migrate to basel ii by march 31, 2008 and all other scheduled commercial banks encouraged to migrate to basel ii in alignment with them but not later than march 31, 2009. in addition to the exercise of normal prudential requirements on banks, the reserve bank has also successively imposed additional prudential measures in respect of exposures to particular sectors, akin to a policy of dynamic provisioning. for example, in view of the accelerated exposure observed to the real estate sector, banks were advised to put in place a proper risk management system to contain the risks involved. banks were advised to formulate specific policies covering exposure limits, collaterals to be considered, margins to be kept, sanctioning authority / level and sector to be financed. in view of the rapid increase in loans to the real estate sector raising concerns about asset quality and the potential systemic risks posed by such exposure, the risk weight on banks'exposure to commercial real estate was increased from 100 per cent to 125 per cent in july 2005 and further to 150 per cent in april 2006. the risk weight on housing loans extended by banks to individuals against mortgage of housing properties and investments in mortgage backed securities ( mbs ) of housing finance companies ( hfcs ) was increased from 50 per cent to 75 per cent in december 2004, though this was later reduced to 50 per cent for lower value loans. similarly, in light of the strong growth of consumer credit and the volatility in the capital markets, it was felt that the quality of lending could suffer during the phase of rapid expansion. hence, as a counter cyclical measure, the reserve bank increased the risk weight for consumer credit and capital market exposures from 100 per cent to 125 per cent. 2 an additional feature of recent prudential actions by the reserve bank relate to the tightening of regulation and supervision of non - banking financial companies ( nbfcs ), so that regulatory arbitrage between these companies and the banking system is minimized. the overarching principle is that banks should not use an nbfc as a delivery vehicle for seeking regulatory arbitrage opportunities or to circumvent bank regulation ( s ) and that the activities of nbfcs do not undermine banking regulations. thus, capital adequacy ratios and prudential limits to single / group exposures in the case of nbfcs have been progressively brought nearer to those applicable to banks. the regulatory