who hold the bonds till maturity. even banks investing in sdls are averse to trading because of the valuation norms which facilitate nudging up of the price of sdl in banks ’ books and insulation from market risks offered by htm dispensation. with an objective to ensure banks ’ bond portfolios reflect their current market valuation, it has been decided that the sdls should be valued based on observed prices. this measure could potentially discourage passive investment by banks and improve trading volumes in sdl. the market is also devoid of market - makers providing two - way quotes, thereby impacting liquidity. risk asymmetry in sdls following the recommendations of the 12th finance commission, government disintermediated from the borrowings of state governments from fy06 onwards. it was expected that a rise in the volume of market borrowings would enhance the scrutiny of the states ’ fiscal health, and superior fiscal management would be incentivized through lower borrowing costs. however, the cut - off yields of sdls issued by states in any given auction remain narrowly clustered, despite large variations in the state governments ’ fiscal performance. a closer look at the data indicates that there has been no significant difference in inter - state spreads, which on an average have been between 5 - 7 bps. states with better fiscal parameters have expressed view that the market is not providing any incentive for better performance on fiscal front. the issue pertaining to risk asymmetries across states have been receiving policy attention as can be seen from observations in two reports viz., the economic survey 2016 - 17 and the frbm review committee report, 2017 headed by shri n. k. singh. i ) the economic survey 2016 - 17 stated that greater market - based discipline on state government finances is missing, as reflected in the complete lack of correlation between the spread on state government bonds and their debt or deficit positions. it was observed that there is a flat relationship between the spread and the indebtedness of states therefore states are neither rewarded nor penalized for their debt performance. ” ii ) the frbm review committee report titled “ responsible growth : a debt and fiscal framework for 21st century india ” published in january 2017 stated that despite sdl borrowing rates being market determined, it is felt that risk asymmetries across states are not adequately reflected in the cost of borrowings. the report observed that few well managed states with good fiscal performance have expressed that they are not adequately compensated for better management of

hinted at possible conflicts between some of these objectives. finding the right balance between them is clearly the goal of financial sector policy and regulation, but this is not the place to go into that set of issues. i shall now try and provide a brief description of how both the idea of deposit insurance itself and the way in which it is provided relate to the five broad objectives of financial sector development. the role of deposit insurance deposit insurance has clearly been around for a long time and its utility as an instrument of trust and confidence in the financial ( or perhaps more narrowly in the banking ) system has rarely been in question. rather, the question that now faces us is whether it can be expanded and re - structured to address a greater variety of requirements that the financial system now has. these are issues that will obviously be discussed during the technical sessions of this conference and i look forward to being informed of the significant points that emerge from them, both for my own education and as inputs into the shaping of strategies for dicgc. here, i will confine myself to a few illustrations of how deposit insurance fits into the broader financial development framework. with regard to efficiency, the existence of insurance is perhaps less important than the way in which it is structured. deposit - taking financial institutions, particularly those servicing a large number of relatively small accounts can obviously be mandated to buy insurance. but, this will impact their operating costs, which depositors will bear to some extent. one way of encouraging overall efficiency is to differentiate insurance premiums between institutions based on some objective measure of the riskiness of their loan and asset portfolios. this will help to bring about a better alignment between the cost of funds and the portfolio risks across the deposit - taking financial sector. stability is clearly the objective with the most direct connection with deposit insurance. by providing depositors with the assurance that at least some of their money is safe no matter what happens to the institution, it provides a huge incentive for people to use the system, with consequent benefits for the economy as a whole. but, the viability of any insurance scheme is based essentially on the premise that claims will originate from only a small proportion of the insured population at any given time. a crisis is a situation in which virtually the entire population will make claims at the same time. from a welfare perspective, the core objective of protecting depositors ’ interests becomes even more paramount in such a situation. however, from the perspective of resources, the cost providing full insurance against catastrophic