s s mundra : banker - borrower interplay – synergies & challenges inaugural address by mr s s mundra, deputy governor of the reserve bank of india, at the “ bankers - borrowers - business meet ”, organized by the associated chambers of commerce and industry of india ( assocham ), new delhi, 23 march 2015. * * * assistance provided by shri r. kesavan is gratefully acknowledged. 1. shri a. c. mahajan, chairman, bcsbi ; shri m. narendra, chairman, assocham national council for banking & finance ; shri ashvin parekh, md apas llp ; other dignitaries on the dais ; colleagues from the banking fraternity ; members of assocham ; representatives of the print and electronic media ; ladies and gentlemen! let me begin by complimenting assocham for flagging an issue that is so relevant and contemporaneous for the banking industry. banks face immense challenges in the area of management of loans and advances in view of the mounting non - performing assets. these challenges exist in spite of the normal rigors that are specified by the regulator and banks ’ own head and controlling offices. an increasing number of enabling statutes and enactments coupled with fair practice lending codes make the job of a lender extremely challenging and open to scrutiny. it is against this backdrop that the bankers - borrowers “ love - hate ” relationships need to be analysed. it seems to be an imaginative idea on part of assocham to invite the banking supervisor to inaugurate the session in a bid to arbitrate between the banker and borrower and invite the wrath of both! on a more serious note, a determining aspect of the banker - borrower relationship is built on trust and understanding. it is also important that these relationships neither get too cosy nor do they get too strained as either would have deleterious consequences for the sector and the larger economy. the banking regulations in a way set the ground rules for bank - borrowers relationship, while the supervisory process ensures that this relationship remains healthy. based on my own practical experience in the field - first as a commercial banker and now as the banking supervisor, i intend to highlight some of the behavioral practices that rbi expects from the bankers and the borrowers. i would also emphasize some regulatory / supervisory concerns that currently exist and could arise from unhealthy relationships between the two. banker - borrower relationship : built

and are preparing their it systems with the help of external consultants. in terms of regulation, as i already noted, the bank of thailand has begun implementing ias 39 for the impairment of assets or npl since december last year. by june this year, commercial banks have set an additional provision of about 90 billion baht, with their bis ratios remaining comfortably well above the minimum requirement at 14 percent. we at the bot are studying the remaining issues of ias 39 pertaining to supervisory policies and financial impacts on the banking sector. and our policies on components of capital and related reports are scheduled to be prescribed by the end of next year. ladies and gentlemen, implementing basel ii and ifrs has been a challenging experience. for basel ii, the most difficult issue is arguably going to be the application of the principles embedded in pillar 2 where supervisors have the ability to require banks to hold capital in excess of the minimum. since the amount of required capital has a direct impact on business performance, it is therefore quite a challenge for supervisors to be requiring banks to hold different amounts of additional capital. for accounting standards, the most recent challenge is the accounting methods for sophisticated financial products, such as cdo and structured notes, in which differences in financial assets ’ classifications can result in different financial impacts. for example, held - tomaturity classification conceals profit or loss until maturity, while trading classification charges profit or loss to financial statements in every accounting period. the interpretation for a suitable classification relies significantly on the intention of bank management as well as on the judgment of external auditors. the importance of this issue, as we know, has reemerged more demandingly following the sub - prime crisis in the us. another practical challenge in implementing both standards is the use of complex financial models to measure risks in banks ’ portfolio. in order to confidently use the models, there must be sufficient data, appropriate risk measurement techniques, and a rigorous validation process. at present, the most important concern is the lack of data. for example, for credit risk measurement, a certain amount of data on default is required. such data typically are not readily available, and this is also the case here in thailand. in addition to the lack of data, the ias 39 also allows the use of fair value for all financial assets and liabilities, or the fair value option. although this concept is attractive, there are still many concerns from a regulatory point of view. the fair value option may be inappropriately used and may result