provides an adequate buffer for unexpected losses. the internal rating based ( irb ) model approach under basel ii credit risk capital computation gave a fillip to the expected loss based provisioning and unexpected loss based capitalisation. in the immediate aftermath of the crisis, in april 2009, the g20 leaders called upon the accounting standard setters to work urgently with banking supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high quality global accounting standards. the basel committee on banking supervision ( bcbs ) took it forward by publishing a document in august 2009 titled guiding principles for replacement of ias 39 that was also sent to the international accounting standards board ( iasb ). these principles state that loan loss provisioning should be robust and based on sound methodologies that reflect expected credit losses in the banks ’ existing loan portfolio over the life of the portfolio. the accounting model for provisioning should allow early identification and recognition of losses by incorporating a broader range of available credit information than presently included in the incurred loss model. for the purpose of these principles, expected credit losses are estimated losses on a loan portfolio over the life of the loans and considering the loss experience over the complete economic cycle. post - crisis, there is convergence of views among the prudential regulators and accounting standard setters on the desirability of a forward looking expected loss approach to loan loss provisioning. in reality, financial results do objectively worsen in an economic downturn in a way similar to the rise in unemployment rates. therefore applying an impairment model based on expected losses is arguably a faithful representation of current conditions. the iasb, financial accounting standards board ( fasb ) as well as the bcbs are actively engaged in finding a solution to this complex problem. in this context, the expected loss based provisioning approach is a topic of significant interest for the global financial markets. even when banks and accountants were making incurred loss based provisioning for identified losses, called “ specific ” provisions, they also voluntarily did make some sort of “ general ” provisions or “ floating ” provisions. these “ general ” provisions are not based on any expected loss model, but as a prudent practice to strengthen the balance sheets. the basel committee also incentivises general provision up to 1. 25 % of credit risk weighted assets by counting towards tier 2 capital. bis central bankers ’ speeches concepts and principles dynamic provisioning is a technique that allows banks to build up loan loss provisions when their profits are growing to draw

the financial system is also providing clear indications of a pick up in activity. there has been improvement in the growth of non - food bank credit reflecting a better outlook for industrial growth. there has been an increase in the credit disbursed to the housing sector and industries like coal, iron and steel, textiles, fertiliser, drugs and pharmaceuticals, cement, construction, petroleum, computer software, automobiles, gems and jewellery and power. the increase in credit demand is not, however, evenly spread. the investment of scheduled commercial banks in non - slr instruments has shown a distinct improvement from a comparatively negligible level last year. money supply ( m3 ) has been tracking real output developments and inflation conditions with a continuing preference for safety reflected in the appetite for bank deposits. although various segments of the indian financial markets have remained relatively unaffected by international financial developments, equity markets have moved down along with global equity markets. on the other hand, the strength of capital flows has resulted in a modest appreciation of the exchange rate of the rupee vis - a - vis the us dollar. first quarter balance of payments data indicate that the current account remains in surplus as in the preceding year. the foreign exchange reserves have risen to a level of us $ 67 billion, currently the seventh largest in the world. under these conditions, the stance of monetary policy, reiterated recently in the statement on the mid - term review of monetary and credit policy on october 29, 2002, is provision of adequate liquidity to meet credit growth and support investment demand, consistent with price stability ; to continue the soft interest rate stance and greater flexibility in the interest rate structure over the medium term. the policy stance was signalled through 25 basis points cuts each in the bank rate and the repo rate. monetary policy also renewed its commitment to monitoring conditions in the foreign exchange market with watchfulness as well as flexibility. financial intermediation is not just a mirror of the real economy ; it is also a derivative. around us, the prolonged global slowdown is increasingly reflected in heightened risk aversion in international financial markets. fortunately for us in india, we seem to be breaking out early from the synchronised global downturn. our banks, financial institutions and financial markets have responded encouragingly to the impulses for growth, reinforcing the virtuous aspects of the movement between real and financial activity. it is vital that we take advantage of this early lead and seize the opportunities for financial intermediation in the