years following the global financial crisis, emes and financial markets have been buffeted by global spillovers which have amplified both sudden surges and sudden stops or reversals of capital flows. the existing state of financial safety nets, regional or multilateral, fall grossly short of providing the necessary buffers against such turbulence. moreover, access to swaps from systemically important central banks is not available to the emes. for many emes, high fluctuations in currency movements have pronounced macroeconomic consequences. this is corroborated in a recently articulated view by mark carney, governor, bank of england that significant improvements in the institutional frameworks of emes are being offset by asymmetries in the international monetary system and market - driven finance. 1 against this backdrop, these countries have accumulated reserves over the past two decades which has significantly reduced the sensitivity of capital flows to push factors. governor carney adds that this extra insurance, however, has come at a high cost for emes. in this context, i may mention that in spite of the insurance coming at a high cost, there is enough evidence to indicate that costs of financial crises have been very high in relation to costs of insurance. thus, it is evident that build - up of reserves by emes, so far is not so much to prop up their currencies as to selfinsure themselves against global contagion. 2 / 4 bis central bankers'speeches 9. how do we collectively ensure that multilateral principles and frameworks for orderly exchange rate and payment arrangements are not superseded by bilateral hegemony? the best way forward is to strengthen existing institutions like the fund and make them more relevant and trusted. through its articles of agreement, the fund is a quota - based organisation, but quotas currently constitute only 49 per cent of its resources. at the height of the global financial crisis and in the years following it, the fund activated borrowing arrangements such as the new arrangements to borrow ( nab ) and the bilateral note purchase agreements ( npas ), to which india also contributed. these borrowing arrangements are, however, intended to be temporary bridges. the solution lies in commitments of quota resources by members in order to secure the legitimacy of the fund as a global lender of the last resort, the overseer of the international monetary system and a trusted policy advisor. this adds urgency to the completion of the 15th general review of quotas, delayed for the fourth year now. 10. the global order today faces

the attendant cumbersome paper work. there are lessons to be learnt from the experience of the kisan credit card ( kcc ) schemes and the laghu udhyami credit card schemes to the agricultural and small entrepreneur borrowers. surely, there is some scope for extending the benefits of hassle free credit facilities through similar innovative methods to other borrowers requiring credit limits of over rs. 2 lakh also. it needs to be recognised that the sme sector has tremendous growth potential and accordingly pricing of loans to this sector should be at commensurate rates. thus, there is need for realignment of interest rates among various segments of the financial market. as the financial market develops, ideally the interest rates on all types of debt instruments, both in the government and private sectors, and in the credit market should align in a relatively narrow band, reflecting realistic risk premia. there have been some signals of industrial pick up during the last few months. for the four months from july to october 2002, on a point to point basis, the rise in index of industrial production ( iip ) has been above 6 per cent. a major contribution to the high growth rates has been the manufacturing sector. in use - based classification also, the capital goods sector has registered impressive growth rates of over 15 per cent and 12 per cent in september and october 2002 respectively. most ( 14 out of 17 ) industry groups in the index have shown positive growth rates. the increase in non - food credit of scheduled commercial banks during the current financial year also appears to be commensurate with the iip performance. nevertheless, banks have shown a marked preference for investments in government securities instead of pursuing their core activity of lending to commercial sector. at an aggregate level, the slr holdings of banks are close to 39 per cent as compared to the regulatory prescription of 25 per cent. even strong commercial banks seem to be voluntarily adopting ‘ narrow banking ’ in a bid to minimize credit risk while increasing profitability. such large investments in government securities well beyond the statutory requirement reflect dissipation of banking knowledge capital with regard to credit appraisals. the interest rate risk on investments in gilts need hardly be over emphasised. further, the current focus of banks is bound to exact some heavy costs in terms of efficiency and credit availability. there is a danger of the link between liquidity, credit, money and economic activity being severed in the long run as a result of continued over - investment in government