of market infrastructure 5. appropriately, in this context, is an observation made in an imf staff position note 6 in respect of the financial system prior to the crisis : “ financial systems and transactions became distorted along several dimensions, that is, financial system grew highly complex, opaque, over - leveraged and heavily interconnected ; liquidity risk was higher than recognized ; large complex institutions enjoyed the benefits of being “ too important to fail ” and financial intermediation has increasingly shifted to the shadow banking sector. ” the two dimensions of systemic risks cutting across specificities, the different perspectives of systemic risks can be grouped into two dimensions – a time dimension and a cross sectional dimension. the time dimension of systemic risks, or what is more commonly known as procyclicality, relates to the progressive build - up of aggregate risk over time. the second dimension of systemic risk – common exposures / interlinkages in the cross section focuses on how risk is distributed within the financial system at any given point in time. an analytical framework to identify systemic risks must operate in both dimensions. assessing systemic risks as i mentioned earlier, the international financial crisis has refocused policy attention on systemic risks and forced us all to think much harder – about what systemic risk means, how it can be measured and what implications does it have for policy. there is a general consensus that systemic risk was underestimated across the board before this crisis and also that there is a pressing need to assess and evaluate such risks on an ongoing basis. considerable efforts are ongoing, both internationally and amongst systemic regulators domestically, to develop a framework for assessing systemic risks and for potentially predicting systemic events. the objective is to put in place an assessment infrastructure which is capable of raising “ flags ” i. e., signalling trends that could make markets or countries vulnerable to unanticipated events. with the increasing realization that systemic risks per se are generally complex, very often opaque, and always multifaceted, came the realization that the identification of such risks is “ risk measurement and systemic risk ”, andre icard, deputy general manager of the bank for international settlements, at the fourth joint central bank research conference on risk measurement and systemic risk, european central bank, frankfurt, 8 november 2005. “ shaping the new financial system ”, the international monetary fund ( imf ) staff position note ( spn ) spn / 10 / 15. bis central bankers ’ speeches also far from straightforward. it was felt that in order to see “

controlling risks in the financial system thus helping in maintaining systemic stability. it would be inappropriate to assume that financial literacy and inclusion are not global challenges. at the present juncture as the global financial system is dealing with the aftereffects of financial crisis, it is not so much a question of access but advanced countries are more in need of financial literacy / education than ever before. in india, it is a question both of access to financial products and services and financial literacy. it implies not just providing access but also to educate all stakeholders about the fairness and other characteristics of the financial products / services, such as their risks and returns. capital 7. let me now turn to some other specific issues. first issue staring in the face of banking industry is capital. even though reasonably well capitalized today, banks will be facing the challenge of growing their business due to capital constraints. india ’ s financial system is better at capital allocation than most of the emerging market players. it has some high performing banks, very low stock of gross non - performing loans of about 2. 5 % and deep and liquid equity markets that efficiently discover price in stocks of globally competitive companies in bpo, it, r & d, pharmaceuticals, automobiles, telecom and hospitality space. still one of the challenges will be capital raising by corporate sectors but not at the expense of agriculture, small industries and business. debate over channeling larger portion of available credit to the most potentially productive sector or to the sectors where the investment efficiency is lower is yet to be fully resolved. in any case, to make banks allocate increased credit to the productive sectors of the economy is strongly predicated on the bank capital strength. to do so, more capital would be required to be infused into banks. with requirements of basel iii looming large, banks would be facing challenges in raising additional capital for meeting the funding needs of indian economy potentially growing at 9 % plus. 8. post - crisis, regulators worldwide are discussing a macro - prudential framework that would involve a regulatory policy focused on the system as a whole, rather than individual players. capital buffers are an extremely important component of the new macro - prudential regulatory framework. the new framework aims at improving both quality and quantity of capital. let us understand that capital is a competitive charge on the resources available for lending with a bank and hence, stepping up counter - cyclical capital requirements and providing capital buffers comes with a cost for the banking system. capital enhancement, bis central bankers