banking system while considering these options and it was decided that banks in india will initially adopt the standardised approach ( sa ) for credit risk and the basic indicator approach ( bia ) for operational risk. the prime considerations while deciding on the likely approach included the cost of implementation and the cost of compliance. before coming to specifics i may like to mention that overall capital is what makes financial systems stable. in general, expected losses are to be covered by earnings and provision and hence the need to price risk appropriately. unexpected losses or losses beyond the normal range of expectations need have to be met by capital. let me briefly review the steps taken for implementation of basel ii and the emerging issues. • the rbi had announced in its annual policy statement in may 2004 that banks in india should examine in depth the options available under basel ii and draw a road - map by enddecember 2004 for migration to basel ii and review the progress made at quarterly intervals. • the reserve bank organized a two - day seminar in july 2004 mainly to sensitise the chief executive officers of banks to the opportunities and challenges emerging from the basel ii norms. • soon thereafter all banks were advised in august 2004 to undertake a self - assessment of the various risk management systems in place, with specific reference to the three major risks covered under the basel ii and initiate necessary remedial measures to update the systems to match up to the minimum standards prescribed under the new framework. • banks were also advised to formulate and operationalise the capital adequacy assessment process ( caap ) as required under pillar ii of the new framework. • reserve bank issued a guidance note on operational risk management in november 2005, which serves as a benchmark for banks to establish a scientific operational risk management framework. • we have tried to ensure that the banks have suitable risk management framework oriented towards their requirements dictated by the size and complexity of business, risk philosophy, market perceptions and the expected level of capital. • risk based supervision ( rbs ) in 23 banks has been introduced on a pilot basis. • as per normal practice, and with a view to ensuring migration to basel ii in a non - disruptive manner, a consultative and participative approach had been adopted for both designing and implementing basel ii. a steering committee comprising senior officials from 14 banks ( public, private and foreign ) had been constituted wherein representation from the indian banks ’ association and the rbi was ensured. the steering committee had formed subgroups to address specific issues. on

account, not only their capacity to compute the capital requirement under those approaches but also their capacities to sustain the bank ’ s risk profile and the consequent capital levels under various scenarios, especially stress scenarios. • the preconditions for migration to the advanced approaches would include ( a ) well established, efficient and independent risk management framework ; ( b ) supported by well established, efficient it and mis infrastructure ; ( c ) cost benefit analysis of adoption of advanced approaches ; ( d ) availability of appropriate skills and capacity to retain / attract such skills at all points in time ; and ( e ) a well established, effective and independent internal control mechanism for supplementing the risk management systems. i hope the subsequent sessions would discuss in greater detail some of these issues. it is important for the sector as a whole to appreciate and internalize the basic philosophy of the basel ii, with all attendant costs and benefits. undoubtedly the discipline of risk management has significantly altered the ethos of the banking as an economic activity. but one point i would like to stress in conclusion is that banks should view the opportunities opened up by these complex financial instruments in the perspective of larger systemic interest. today internationally, when market discipline is being considered an integral part of the regulatory framework, it is imperative for banks to realize that they are equal partners in ensuring financial stability ; and this involves helping build up a risk management culture across all stakeholders. any distortions brought about by misalignment of risk needs and the product being offered to address the risk can only harm and arrest the development of a healthy market.