. thus, there is a significantly reduced credit supply while the economy desperately needs more credit. as noted by governor, dr. subbarao1, the damage financial instability can cause in poor and developing economies can be particularly severe. the striking fact about recessions with financial crises is that credit demand also gets substantially muted and growth takes much longer to pickup compared to other recessions, due to the overhang of debt and high leverage built up by households, corporates, banks and other entities in the financial system during the boom phase of the economy. 5. the pre - crisis period was marked by inadequate understanding of systemic risk and lack of framework to address it. it was also strongly believed that price stability achieved through inflation targeting would provide macroeconomic stability and was a necessary and sufficient condition for achieving financial stability. the regulators and supervisors had to ensure individually strong banks through microprudential regulation, and it was presumed “ financial stability : issues and challenges ”, ( sep 2009 ) – speech by dr. duvvuri subbarao. bis central bankers ’ speeches that the highly sophisticated and efficient financial markets would distribute risks among economic agents who will have the wherewithal to handle risks. in alignment with the exclusive focus of monetary policy on price stability, the ruling doctrine ( greenspan put ) was that, for a variety of reasons, monetary policy was not capable of, and did not have to, respond to asset bubbles. instead, the debris from an asset bubble burst could be handled by aggressively easing monetary policy which would put the economy back on rails. the reason why this doctrine had survived till recently was because it had worked well in the previous episodes including the stock market crash of 1987 and the more recent dot com bubble. this doctrine now stands completely discredited in the light of the current crisis. the failure of the doctrine can possibly be explained by the much higher level of debt and leverage in the current crisis. 6. it is clear that there was inadequate understanding of systemic risks in the pre - crisis period and there was no framework to address them. in my view, the most notable and novel feature of basel iii framework is creating a framework for dealing with systemic risks and consequently with financial stability issues. 7. let me now briefly discuss how the pursuit of financial stability i. e. dealing with systemic risks, necessarily has a cost in terms of growth. to deal with procyclicality issues ( time dimension of systemic risk ), capital and / or provisioning buffers

, particularly, with the emergence of insurance and pension funds as a “ durable ” investor class for the longterm securities. this became possible due to the sustained efforts devoted to elongation of the maturity profile of government securities. corporate debt market the development of a corporate bond market in india has lagged behind in comparison with other financial market segments owing to many structural factors. while primary issuances have been significant, most of these were accounted for by public sector financial institutions and were issued on a private placement basis to institutional investors. the secondary market, therefore, has not developed commensurately and market liquidity has been an issue. the government had constituted a high level committee on corporate bonds and securitisation ( patil committee ) to identify the factors inhibiting the development of an active corporate debt market in india and recommend necessary policy actions. the committee made a number of recommendations relating to rationalising the primary issuance procedure, facilitating exchange trading, increasing the disclosure and transparency standards and strengthening the clearing and settlement mechanism in secondary market. the recommendations have been accepted in principle by the government, rbi and sebi and are under various stages of implementation. the two stock exchanges, namely, the bombay stock exchange ( bse ) and the national stock exchange ( nse ), as well as the industry body fixed income, money market and derivatives association of india ( fimmda ) have since operationalised respective trade reporting platforms. while all the exchange trades in corporate bonds get captured by concerned exchange ’ s reporting platform, otc transactions can be reported on any of these platforms. the aggregated trade information across the platforms is being disseminated by fimmda on its website. bse and nse have also started order driven trading platforms in july 2007. in practice, however, trading still continues to be largely otc. sebi has also implemented measures to streamline the activity in corporate bond markets by reducing the shut period in line with that of g - sec, reducing the size of standard lots to rs. one lakh and standardising the day count convention. further, to streamline the process of interest and redemption payments, electronic clearing services ( ecs ), real time gross settlements ( rtgs ) or national electronic funds transfer ( neft ) are required to be used by the issuers. further progress is anticipated in regard to rationalising the primary issuance procedures, which is a critical step for moving away from the pre - dominance of private placements. to