most productive uses. the more efficient a financial system is in such resource generation and in its allocation, the greater is its contribution to productivity and economic growth. as resource allocation improves and real returns increase, savings would presumably respond and higher resource generation should result. thus, development of the financial system is essential to the generation of higher productivity and economic growth. i will structure my address along the following lines. first, i will explore in brief the impact of banking sector productivity on the rest of the economy. this is relevant in view of the fact that any discussion on productivity and efficiency issues in banking would need to be judged in conjunction with the level of financial development and other country - specific features. this will be followed by a brief review of banking sector reforms in india. the subsequent section will examine, in some detail, the trends in productivity and efficiency in indian banking. my concluding remarks will be in the nature of the way ahead on areas germane to this sector at the present juncture. 2. how does productivity in banking influence the rest of the economy? economic history provides support for the fact that financial development makes a fundamental contribution to growth. financial development helped in the promotion of industrialisation in developed countries by facilitating the mobilisation of capital for large investments. well - functioning banks or other financial intermediaries such as venture capital funds also spur technological innovation by identifying and funding entrepreneurs who are perceived to have the best chances of developing new products successfully and for implementing innovative production processes. recent research has provided robust evidence supporting the view that financial development contributes to economic growth. at the cross - country level, various measures of financial development ( including measures of financial sector assets, domestic credit to private sectors and stock market capitalization ) are found to be positively related to economic growth. other studies establish a positive relationship between financial development and growth at the industry level ( rajan and zingales, 1998 ). similarly, at the firm level, firms in countries with deeper financial development are able to obtain more external funds and thereby enabled to grow faster ( demirguc - kunt and maksimovic, 1998 ). a basic indicator of financial development is the contribution of finance - related activities to gdp. the share of real gdp originating from finance - related activities in india tripled from just around 2 per cent during the 1970s to around 6 per cent during the 1990s and further to 7 per cent during the first half of this decade. within the services sector, the share of finance rose from less than

v leeladhar : basel ii accord and its implications speech by mr v leeladhar, deputy governor of the reserve bank of india, at the bankers ’ club, mangalore, 11 march 2005. * * * ladies and gentlemen, it is my pleasure to share my thoughts with you on a subject which is currently engaging the attention of the banking community, not just in india but worldwide. let me first admit upfront that although i am at the moment wearing the regulator ’ s hat, yet i have been a commercial banker for most part of my professional career. so, the banker in me still goads me to put myself in bankers ’ shoes before evaluating any regulatory options. i can better appreciate some of nuances from a practical stand point, and therefore shall try to put them more from a banker ’ s perspective rather than that of a regulator. managing risk is increasingly becoming the single most important issue for the regulators and financial institutions. these institutions have over the years recognized the cost of ignoring risk. however, growing research and improvements in information technology have improved the measurement and management of risk. it ’ s but natural therefore, capital adequacy of a bank has become an important benchmark to assess its financial soundness and strength. the idea is that banks should be free to engage in their asset - liability management as long as they are backed by a level of capital sufficient to cushion their potential losses. in other words, capital requirement should be determined by the risk profile of a bank. the initial capital accord of 1988 was hugely successful with more than 100 countries accepting it as a benchmark. one of the major reasons for the success of this framework was its being simple. it brought in uniformity and attempted to make regulatory capital requirement consistent with the economic capital. reserve bank of india introduced risk assets ratio system as a capital adequacy measure in 1992, in line with the basel accord of 1988, which takes into account the risk element in various types of funded balance sheet items as well as non - funded off balance sheet exposures. in fact, rbi norms on capital adequacy at 9 % are more stringent than basel committee stipulation of 8 %. shortcomings in the present accord however, the present accord has been criticized as being inflexible due to its focus on primarily credit risk and treating all types of borrowers under one risk category regardless of credit worthiness. the major criticism against the existing accord stems from its • broad brush approach