Mahesh Kumar Jain: Building a more resilient financial system in India through governance improvements

Speech by Mr Mahesh Kumar Jain, Deputy Governor of the Reserve Bank of India, at the India international Centre, New Delhi, 18 June 2021.

Central bank speech  | 
17 August 2021
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 |  8 pages

Ladies and Gentlemen. Warm Greetings. At the outset, let me thank India International Centre for hosting this very important session on building a resilient financial system, when the resilience of the society itself is being tested by the Covid-19 pandemic. At a broader level, resilience is defined as the ability of a system, community or society exposed to hazards to resist, absorb, accommodate to and recover from the effects of a hazard in a timely and efficient manner, including through the preservation and restoration of its essential basic structures and functions. I am confident that, we, as a country, will resist, absorb, accommodate to, and recover from the effects of Covid-19 very soon.

Meaning of Resilience of Financial System

In the context of financial system, a resilient financial system is one which is able to absorb the impact of endogenous shocks it is exposed to, rebound quickly to the original condition or adapt to new environment, and continue to perform its role of providing financial services. This definition of resilient financial system is different from a stable financial system. A stable financial system is one which is able to absorb shocks, whereas a resilient financial system will be able to adapt and reconfigure itself in response to a shock, in addition to absorbing it. To put it simply,

"..a robust system will be one designed to withstand a once in 100-year event for example, an approach used in risk management. In contrast resilience makes no assumptions about the magnitude of possible shocks, but rather looks to build systems that can deal with the entire range of shocks-.."

As such, our efforts should be focussed on building a financial system which is not just stable, but also resilient, as the type, source, magnitude and frequency of shocks are turning out to be highly unpredictable and non-measurable to a significant degree. Accordingly, focus of regulation and supervision of financial system should be to make sure that financial system as well as individual financial institutions are not just able to absorb the shocks, but are able to adapt to the changed circumstances.

Now, I would like to discuss some of the critical behavioural/cultural issues which, if handled appropriately, have the potential to tremendously improve the resilience.