billion plus people, spread over 600, 000 habitations, covering vast distances, with poor infrastructure and sometimes inhospitable terrain by traditional brick and mortar branches. 39. we need to think laterally, harness technology, adopt effective dissemination practices and reach out to all the people across the country to provide at least minimal banking services. financial inclusion is especially valuable as it will at once promote both growth and equity. i can hardly overemphasize how big a challenge financial inclusion is for banks, for the banking regulator and for the government. working to meet this challenge can hardly be a boring proposition. second challenge : financing infrastructure 40. distinct from other large emerging market economies which are typically demand constrained, india has been, and will remain in the foreseeable future, a supply constrained economy. the biggest supply constraint is of infrastructure – physical, social and urban. it is widely recognized that poor and inadequate infrastructure is adding to production costs, denting productivity of capital and eroding the competitiveness of our productive sectors. 41. the eleventh five year plan targets increase in infrastructure investment from around 5 per cent of gdp in 2006 / 07 to 9 per cent by 2011 / 12. this translates to cumulative infrastructure investment over the plan period of over rs. 20 trillion ( us $ 520 billion ). almost one half of this investment is to be funded through debt, and as much as 43 per cent of this total debt requirement ( 21 per cent of overall planned investment ) is planned to be financed by banks. we have to await the mid - term appraisal of the eleventh plan for an update of the above numbers. regardless of any revision the numbers may undergo, what is clear is that the financing needs of our infrastructure are huge. 42. a big issue in bank financing of infrastructure is the asset - liability mismatch. while infrastructure typically requires long term funding, the deposits of banks, their main source of funds, are relatively short - term. the problem of asset - liability mismatch in long term financing is not unique to india ; banks elsewhere too face the same problem. but in advanced economies, the long term finance space is filled by insurance companies and pension and provident funds. if some of the pending legislation gets through, in india too we can expect new sources of long - term financing to open up. but until that happens, the burden of infrastructure financing will have to be met largely by the banks. in order to partly offset this problem, the reserve bank

based on the lessons of experience. we need to build a safe and enterprising banking sector that supports growth while preserving financial stability. we need to nurture financial markets and institutions within clearly defined and effectively supervised boundaries. doing all of this is the basic thrust of the international reform agenda currently under discussion to which i now turn. v. international reform initiatives – will they make banking boring? 19. the reform initiatives in the wake of the crisis are intended to rein in the “ irrational exuberance ” of the banking sector, keep it safe and healthy, and make banking an aid for growth and macroeconomic stability. what is relevant to our discussion here is that none of these measures is aimed at making banking boring ; on the contrary, several of them will likely make banking more challenging and thereby spur innovation of a more value adding and sustainable variety. in order to enable an appreciation of this, let me provide a brief synopsis of the various initiatives under discussion from the macro and micro perspectives. the macro perspective 20. one clear lesson of the crisis is that regulation and supervision at the institution level is necessary, but not sufficient. even if each institution is healthy and safe on a stand - alone basis, systemic risk can build up because of procyclical, herd behaviour – what economists call the fallacy of composition. it is therefore necessary to supplement micro - prudential regulation with macro prudential oversight. 21. at a macro level, to address procyclicality and contain leverage, three important initiatives are underway : ( i ) development of capital buffers that banks would be required to maintain to counter cyclical effects ; ( ii ) requirement for institutions to set provisions on a dynamic basis, i. e. building up buffers in good times to be drawn down in bad times ; and ( iii ) developing a metric to contain excessive leverage in banks to supplement the risk based capital ratio. 22. a somewhat original idea proposed by prof. raghuram rajan, currently under discussion, is to require institutions to maintain “ contingent capital ” to tide over systemic crisis or idiosyncratic problems. this proposal will potentially require banks to issue long - term debt instruments that would automatically covert to equity under specific triggers. this contingent arrangement will accordingly enable banks coming under stress to quickly buffer their capital without imposing any cost on tax payers. all this will not, of course, be costless. the challenge is to design the contingent capital provisions in a way that optimally manages