money above the level of comfort of the monetary authorities, there would be concerns around controlling money supply and transmission of monetary policy impulses and may hinder achieving the broader objectives of price stability. therefore, it ’ s not just unqualified, unconditional ‘ credit growth ’ which is crucial for economic development, but ‘ orderly credit growth ’ which maintains and anchors financial stability in system and that in turn ensures sustainable growth over the long term. necessity for regulation of credit market given the size of credit portfolios of financial institutions and the large share which credit risk plays on their balance sheets, it is imperative that any strategy to maintain financial resilience of the institution and financial system stability needs to consider ‘ credit risk ’ as its core element. source : supervisory returns, rbi if we delve a little deeper into the landscape of credit risk, it is apparent that there are three fundamental elements which need to be factored in, namely - ‘ trust ’, ‘ prudence ’, and ‘ contractual arrangements ’ which are also mutually inter - connected. information asymmetry may result in vulnerabilities despite having due contractual arrangements in place which can potentially impede the process of credit intermediation. regulatory frameworks and policies come into play here and our regulatory policies require well thought out frameworks relating to credit appraisal, due diligence, recovery and resolution, in order to overcome this trust deficit or compensate for it in some manner or the other. the policies seek to ensure that the risks associated with lending business are prudentially measured, managed, and provided for. from the perspective of this thematic seminar, let me focus on the ‘ prudential ’ aspect of credit risk management for which we have a principle - based regulatory approach. to describe our approach in an engaging manner, we can call it a 5m framework for risk management which focuses on the following five elements – measuring, monitoring, managing, mitigating, and migrating. the elements of this framework are not mutually exclusive and interact with and relate and reinforce each other. to elaborate : • measurement : peter drucker, the famous management expert once said that “ if you cannot measure it, you cannot manage it ”. i believe this to be a universal principle, and banking regulations around risk management also follows a similar approach. in order to measure the credit risk, all the regulators around the world, including the reserve bank, have prescribed detailed guidelines to enable a proper measurement of the risk. • monitoring

: this aspect of credit risk management largely relies on the monitoring and oversight exercised by the financial institutions through their policies which have to be dovetailed with the prudential norms prescribed by the regulators. the concerned financial institutions are mandated to frame prudent policies on risk management, governance, compliance, etc. these norms are intended to overcome any inherent moral hazard in the system. there are usually three layers of internal checks prescribed for the institutions - first, underwriting and due diligence at the time of origination of loans, second, adherence with internal risk management and compliance practices, and third, internal audit. this is examined as part of supervisory oversight wherein apart from assessing the efforts of financial institutions on these parameters, supervisors also assess if the general or other provisions maintained by the bank truly reflect the inherent risk. • management : factoring in the risk - and - reward payoff, the financial institutions may prefer to bear and manage some risk as part of its risk management practice. that would be essentially a business call. but in order to ensure that the regulated entities are well capitalised in proportion to the risk they are carrying, regulators across the world prescribe capital adequacy norms where minimum regulatory capital is provided by the banks based on certain principles. this then becomes the first level of risk management wherein the risk is absorbed internally, and adequate capital is provided for the same. besides, pricing of credit also influences this risk return trade - off. • mitigation : if the risk taken by financial institution grows beyond its comfort zone ( ‘ risk appetite ’ ), then they may have to manage it actively rather than merely absorbing it. this risk mitigation is enforced at two levels – first by the regulators – which is mostly prudential in nature like provisioning norms or exposure limits. second at the institutional level, wherein the institutions themselves may prescribe exposure limits to manage concentration risks or put certain collateral constraints on borrowers or prescribe stringent covenant to manage the risks. in addition, financial institutions may also deploy permitted credit risk mitigants such as loan guarantees, collateralised transactions, on balance - sheet netting, etc. to mitigate credit risks. • migration : this involves taking the risk out of the bank ’ s books. there could be several tools available for transfer or migration of credit risk, but i am going to touch upon two of them. first and probably the most popular way is to simply transfer the asset ( loan ) and associated risk to another