in india. vi ) improving risk management systems : with the increasing degree of deregulation and exposure of banks to various types of risks, efficient risk management systems have become essential. as you are aware, as a step towards further enhancing and fine - tuning risk management systems in banks, reserve bank has issued guidelines on asset - liability management and risk management systems in banks in 1999 and guidance notes on credit risk management and market risk management in october 2002 and the guidance note on operational risk management in 2005. though basel ii focuses significantly on risks its implementation should not be seen as an end in itself. it should be seen as a medium whereby the risk management systems in banks are constantly upgraded to address the changing environment. at the initial stages of development of the risk management systems, banks were managing each risk in isolation. the current business environment demands a more integrated approach to risk management. it is no longer sufficient to manage each risk independently or in functional silos. enterprises worldwide are, therefore, now putting in place an integrated framework for risk management which is proactive, systematic and spans across the entire organisation. banks in india are also moving from the individual silo system to an enterprise wide risk management system. this is placing greater demands on the risk management skills in banks and has brought to the forefront the need for capacity building. while the first milestone would be risk integration across the entity, banks are also aware of the desirability of risk aggregation across the group both in the specific risk areas as also across the risks. banks would be required to allocate significant resources towards this objective over the next few years. in the reserve bank, we have adopted the risk based approach to supervision since 2003 and have brought about 23 banks under the fold of risk based supervision ( rbs ) on a pilot basis. on the basis of the feedback received from the pilot project, the rbs framework has now been reviewed. the risk based approach to supervision is also serving as a catalyst to banks ’ migration to the integrated risk management systems. in view of the relevance of improved risk management systems under the changing circumstances and the larger emphasis placed on risk management systems in banks under basel ii, it is essential that the rbs stabilizes at an early date and serves as an important feedback not only to bank managements but also to rbi. however, taking into account the diversity in the indian banking system, stabilizing the rbs as an effective supervisory mechanism will be a challenge to the rbi. vii ) implementation of new

accounting standards : derivative activity in banks has been increasing at a brisk pace. while the risk management framework for derivative trading, which is a relatively new area for indian banks ( particularly in the more structured products ), is an essential prerequisite, the absence of clear accounting guidelines in this area is matter of significant concern. it is widely accepted that as the volume of transactions increases, which is happening in the indian banking system, the need to upgrade the accounting framework needs no emphasis. the world bank ’ s rosc on accounting and auditing in india has commented on the absence of an accounting standard which deals with recognition, measurement and disclosures pertaining to financial instruments. the accounting standards board of the institute of chartered accountants of india ( icai ) is considering issue of accounting standards on the above aspects pertaining to financial instruments. these will be the indian parallel to international accounting standards 32 and 39. the proposed accounting standards will be of considerable significance for financial entities and could therefore have implications for the financial sector. the formal introduction of these accounting standards by the icai is likely to take some time in view of the processes involved. in the meanwhile, the reserve bank is considering the need for banks and financial entities adopting the broad underlying principles of ias 39. since this is likely to give rise to some regulatory / prudential issues all relevant aspects are being comprehensively examined. the proposals in this regard would, as is normal, be discussed with the market participants before introduction. adoption and implementation of these principles are likely to pose a great challenge to both the banks and the reserve bank. viii ) transparency and disclosures : in pursuance of the financial sector reforms introduced since 1991 and in order to bring about meaningful disclosure of the true financial position of banks to enable the users of financial statements to study and have a meaningful comparison of their positions, a series of measures were initiated. the disclosure requirements broadly covered the following aspects : • capital adequacy • asset quality • maturity distribution of select items of assets and liabilities • profitability • country risk exposure • risk exposures in derivatives • segment reporting • related party disclosures with a view to moving closer towards international best practices including international accounting standards ( ias ) and the disclosure requirements under pillar 3 of basel ii, reserve bank has proposed enhanced disclosures which lay a greater emphasis on disclosure of certain qualitative aspects. transparency and disclosure standards are also recognised as important constituents of a sound corporate governance mechanism. banks are required to formulate a formal