per employee. these disclosures have been gradually expanded over time and presently include maturity pattern of assets and liabilities ( both rupee and fc ), movements in non - performing loans, issuer composition of non - slr investment, assets subject to corporate debt restructuring as well as details of assets sold to securitisation / reconstruction company. you would also appreciate that the performance of the non - financial sector has an important bearing on financial stability. keeping this in view, the reserve bank has also been closely monitoring the stability ratios of the non - financial sector. in the corporate sector for instance, the reduction in debt liabilities following corporate restructuring and reduced interest expenses in an environment of low interest rates has improved the financial stability indicators in manufacturing. available indications are that both consumption and investment demand are currently buoyant. business surveys also point to high levels of both business confidence and capacity utilisation. the improved investment sentiment and business confidence, as reflected in the increasing number of firms incurring capital expenditure, suggests the prospects for buoyant manufacturing growth in 2005 - 06. you would all be aware that issues of governance in banks has assumed relevance worldwide in the wake of accounting irregularities in the us and elsewhere. problems in governance can derail even the best efforts on the part of regulators to ensure financial stability. to address this aspect, the reserve bank issued guidelines on ownership and governance based on well - defined principles, viz., a well - diversified ownership and control ; important shareholders being ‘ fit and proper ’ ; directors and ceo being ‘ fit and proper ’ and observation of sound corporate governance principles. an important hallmark of the pursuit of financial stability in india has been the adoption of a consultative approach to policy formulation, taking on board the various stakeholders in the financial system. such an approach has had the merit of providing useful lead time to market participants to adjust their behavior in conformity to the regulatory guidelines. evidence suggests that no two crises are exactly alike. as a result, in addition to preventative instruments just discussed, the reserve bank had also resorted to reactive instruments. one such instrument is emergency liquidity support. thus, in very rate and unusual circumstances, when a bank faces a sudden and unforeseen liquidity problem, the reserve bank has, on an earlier occasion, at its discretion, extended liquidity support to the bank. a second such instrument is the provision of safety net in the form of deposit insurance ( di ). in india, di is mandatory and covers

rakesh mohan : central banks and risk management – pursuing financial stability address by dr rakesh mohan, deputy governor of the reserve bank of india, at the 4th annual conference on cash, treasury and risk management in india, new delhi, 21 november 2006. * * * i have chosen to speak on " financial stability " for a number of reasons. although financial stability has always been of concern to central banks, it is a relatively new concept in terms of the widespread attention being given to it in recent years. i thought it would be useful to discuss why it has become so important to central banks. achieving this understanding would also help in explaining some of the behaviour of central banks. i will also try to explain why it is important for us. financial stability - what is it? what is financial stability? despite widespread usage of the term, there is no widespread agreement on a useful working definition of the term. some define financial stability in terms of what it is not – the absence of financial instability. others take a more macro - prudential view and specify financial stability in terms of limitation of risks of significant real output losses in the presence of episodes of system wide financial distress. in the absence of a widely accepted definition it is useful to discuss what we expect a financial system to do. the primary function of the financial system is to smoothly and efficiently facilitate inter - temporal allocation of resources from savers to the ultimate users. this process of intermediation of funds enables the utilisation of available resources to their most productive uses. such a process implies management of financial risk on an inter - temporal basis. in doing so however, the financial system is expected to absorb real economic surprises and shocks. if for some reason this is not done well, it could impair the efficient functioning of the financial system as a whole and engender financial instability. but we need to be careful in thinking about financial instability. disturbances in financial markets or at individual financial institutions need not constitute financial instability if they do not impair overall economic functioning. illustratively, a closure of a small financial institution, or for that matter, movement in asset prices within certain limits or even minor corrections in financial markets need not necessarily hamper stability. on the contrary, fluctuations in asset and other prices in financial markets may actually be good for overall financial stability as adjustment mechanisms. such market adjustments also help to keep authorities alert and sensitive to incipient developments and can enable them to identify and monitor newer risks. what are