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

core banking solutions and adopt ict solutions for financial inclusion. a growing component of inclusive banking is the lending by mfis that are societies, trusts, cooperatives or " not for profit " companies or non - banking financial companies registered with the rbi. this sector currently covers 8. 32 million borrowers ( sa - dhan report 2007 ). the nbfc segment within this sector accounts for 42. 8 per cent of the borrowers and is the fastest growing segment. interest rates on lending to mfis / nbfcs are completely deregulated ; bank lending to such entities for micro finance is treated as priority sector lending. private sector and foreign banks are observed to be actively supporting this sector, which is also attracting private equity funding and philanthropy funding from outside the country. in order to step up lending to agriculture, in 2004 - 05, government of india launched a special programme monitored by nabard for doubling of agricultural credit, and providing relief to distressed farmers through rescheduling and settlement schemes. a programme of interest rate subvention of 2 per cent on crop loans to farmers was also introduced and this scheme, which is being operated for the last three years, is still in force. in 31 districts identified as distressed, a special package was put in place for interest waiver and rescheduling of principal over a long period to minimise debt burden, together with provision of fresh loans to distressed farmers. government of india and respective state governments share the burden of write off. some state governments have, on their own, introduced farmers ’ debt relief programmes. government of india has introduced a comprehensive recapitalisation and reform package for the rural cooperative credit structure, both short term and long term, as this sector was plagued by overdues and accumulated losses resulting in choking of credit flow. the reform package has financial governance and regulatory components to ensure that the sector once strengthened is self - sustaining. the programme is currently under implementation. measures are also being taken by the government to revamp crop insurance and also introduce weather insurance. reserve bank has modified the prudential accounting norms for classification of asset quality with respect to agricultural loans, keeping in mind the seasonality of crops and cash flows. standing instructions are in place for rescheduling loans in areas affected by natural calamities and disasters. in order to enable small farmers with loans up to rs. 25000 to reenter the credit system, banks have been advised to introduce a simplified one - time settlement scheme