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

pay more the loans. when the banks go out of business, it is the millions of tax payers ’ hard - earned money that goes down the drain. customer protection also needs to be seen from protecting customer information and transaction security. the writing on the wall is clear : “ keep your customers happy and survive ”. risks and rewards 18. next important issue that warrants a really careful consideration is the issue of executive compensation. how much compensation is too much? can the industry have a different kind of compensation structure for the same job? can there be uniform board level accountability? flawed incentive compensation practices in the financial sector were one of the important factors contributing to the recent global financial crisis. i am aware that booms are propelled by greed and busts are born out of fear. this quirk of human nature will always ignite the euphoria that fuels the ups and exacerbates the downs. employees were too often rewarded for increasing the short - term profit without adequate recognition of the risks the employees ’ activities posed to the organizations. 19. these perverse incentives amplified the excessive risk taking that severely threatened the global financial system. the compensation issue has, therefore, been at the bis central bankers ’ speeches centre stage of the regulatory reforms. issue of appropriate compensation commensurate with risk or built - in checks to avoid excessive risk taking would have to be managed through a sound corporate governance framework based on strong corporate ethics principles and with reference the principles laid down by financial stability board ( fsb ). the principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes. the principles call for effective governance of compensation and its alignment with prudent risk taking and effective supervisory oversight and stakeholder engagement. the principles have been endorsed by the g - 20 countries and the basel committee on banking supervision ( bcbs ) and are under implementation across jurisdictions. however, banks and other financial system players need to appreciate that good governance is more a matter of practice rather than a matter of compliance. 20. now the question is : with so much of constraints and problems, whether the system will survive? the answer is an emphatic yes because banking is a highly regulated business. but having flagged some of the challenges before the banks, it is incumbent upon me that i flag certain challenges for regulators. we all know that : – the financial system is growing to be highly complex and opaque – sometimes making it difficult to assess the extent of exposures and potential