( dtl ) in eligible government securities. in view of the statutory pre - emption and the long duration of the government securities, banks were permitted to exceed the limit of 25 per cent of total investments under held to maturity ( htm ) category provided the excess comprised only of the slr securities, and the total slr securities held in the htm category was not more than 25 per cent of their dtl. such shifting was allowed at acquisition cost or book value or market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer was required to be fully provided for. the above transition is consistent with international standards that do not place any cap on htm category, and was considered advisable taking into account the statutory nature of the slr while ensuring prudence and transparency in valuation on transfer to htm category. while the earlier prescription for this category was relatively more conservative, the changes in september 2004 recognised the dynamic interface with the interest rate cycles and were counter - cyclical. capital adequacy – risk weights in view of the increase in growth of advances to the real estate sector, banks were advised to put in place a proper risk management system to contain the risks involved. banks were also advised to put in place a system for ensuring proper checking and documentation of related papers before sanctioning / disbursing of such loans. in june 2005, the rbi advised banks to have a board mandated policy in respect of their real estate exposure covering exposure limits, collaterals to be considered, margins to be kept, sanctioning authority / level and sector to be financed. in view of the rapid increase in loans to the real estate sector raising concerns about asset quality and the potential systemic risks posed by such exposure, the risk weight on banks'exposure to commercial real estate was increased from 100 per cent to 125 per cent in july 2005 and further to 150 per cent in april 2006. the risk weights on housing loans extended by banks to individuals against mortgage of housing properties and investments in mortgage backed securities ( mbs ) of housing finance companies ( hfcs ), recognised and supervised by national housing bank ( nhb ) were increased from 50 per cent to 75 per cent in december 2004. however, on a review, banks were advised to reduce the risk weight in respect of exposures arising out of housing loans up to rs. 30 lakh ( usd 75, 000 approx ) to individuals against the mortgage of

y v reddy : global financial turbulence and the financial sector in india – a practitioner ’ s perspective address by dr y v reddy, governor of the reserve bank of india, at the meeting of the task force on financial markets regulation, organized by the initiative for policy dialogue, manchester, united kingdom, 1 july 2008. * * * madam chairperson, governor williams, and friends, at the outset i would like to thank the initiative for policy dialogue, and professors stiglitz, griffith - jones, and ocampo for providing me this opportunity to participate and incidentally share my thoughts on the recent developments in the global financial markets and its implications for both the developing and the developed countries. my presentation will initially provide a broad overview of the global developments and then move on to briefly list the aspects of market and regulatory failures which characterised the recent developments. i will then lay down the broad contours of the financial sector policies in india, with the details of a few specific initiatives relevant to financial stability. the concluding remarks will be in the nature of a few broad issues for further debate. i. global financial markets recent developments while the trigger for the global developments in the financial markets during the recent past was the rising default rates on sub - prime mortgages in the us, the source of the problem was perhaps not the macro - global imbalances but significant mispricing of risks in the financial system. easy monetary policy in major financial centres, globalisation of liquidity flows, wide - spread use of highly complex structured debt instruments and the inadequacy of banking supervision in coping with financial innovations, contributed to the severity of the crisis. the persistent under pricing of risks was suspected by several central banks for quite some time, but it was felt by many that these risks were widely dispersed through financial innovation and that they would not pose any serious problems to the banking system. when the sub - prime crisis did occur, however, it triggered a wide contagion affecting many of the large global financial institutions. banks, in particular, appear to have ceased to trust each other ’ s creditworthiness leading to difficulties in the money markets in the us, europe and the uk resulting in drying up of liquidity, since each financial institution attempted to shore up its own liquidity to meet its obligations. the problems of maturity mismatch in the conduits or structured investment vehicles ( sivs ) created by the banks for purposes of securitisation manifested themselves in a sudden spurt in demand