gist of speeches by rbi governors

8/13/2019 Gist of Speeches by Rbi Governors

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Speech Gallery(Excerpts from various speeches of RBI Governor / Dy. Governors)

Canara Bank RSTC Gurgaon

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No. Topic Page1. Should Banking Be Made Boring? An Indian Perspective:

(25-11-2009 : Dr. Duvvuri Subbarao, Governor : At the International Finance and Banking Conference organized by the Indian Merchants' Chamber on 'Banking -Crisis and Beyond' : Mumbai )

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2. Financial Inclusion: Challenges and Opportunities(09-12-2009 / Dr. Duvvuri Subbarao, Governor / At the Bankers' Club / Kolkata) 9

3. Furthering Financial Inclusion through Financial Literacy and CreditCounseling(30-11-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the launch of Federal

Ashwas Trust on November 30, 2009 in Kochi / Kerala)

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4. Pushing Financial Inclusion: Issues, Challenges and Way Forward (17-07-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At 20th SKOCH Summit2009 / Mumbai)

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5. Banking: Key Driver for Inclusive Growth (10-08-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the Mint's 'ClarityThrough Debate' series / Chennai)

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6. Sustaining Growth Potential : Focus on Key Sectors (11-09-2009 : Smt. Usha Thorat, Deputy Governor / / At the Inaugural Session of the"Conclave of CEOs and CFOs" organised by Institute of Public Enterprise & NMDC

Ltd., CII (AP) & CEO Clubs India / Hyderabad)

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7. Emerging Market Concerns: An Indian Perspective (05-10-2009 : Dr. Duvvuri Subbarao, Governor / / At G-30 International BankingSeminar / Istanbul)

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8. Technology, Financial Inclusion and Role of Urban Cooperative Banks (09-08-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At Foundation Day and

Inauguration of the 'Core Banking Solution Project' of the A. P. Mahesh Co-op Urban Bank Ltd. / Hyderabad)

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9. Global Financial Crisis and Monetary Policy Response in India (12-11-2009 : Mr. Deepak Mohanty, Executive Director / / At the 3rd ICRIER-InWEnt

Annual Conference / New Delhi)

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10. Financial Crisis and Beyond (10-11-2009 : Smt. Shyamala Gopinath, Deputy Governor : At the 3rd India-ChinaFinance Conference : Mumbai)

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11. Learning from Crises (16-10-2009 : Mrs. Usha Thorat, Deputy Governor / 'Institute of Banking andFinance (IBF) Distinguished Speaker Series' lecture / Singapore)

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12. Global Crisis: Genesis, Challenges and Opportunities Unleashed (25-09-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the 21st AnniversaryConvention of the Association of Professional Bankers / Colombo, Sri Lanka)

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13. Global Financial Crisis: Questioning the Questions (31-07-2009 : Dr. D. Subbarao, Governor / / At the Meeting of The AssociatedChambers of Commerce and Industry of India / New Delhi)

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Challenges for the Central Banks {14-08-2009 : Dr. D. Subbarao, Governor (Shri M. Narasimham, Dr. C. Rangarajan, Dr. Y. V. Reddy - Former Governors) / / At Taj Krishna Hotel / Hyderabad}

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15. Impact of global financial crisis on RBI as a National Regulator (29-06-2009 : Smt. Usha Thorat, Deputy Governor / / At the 56th EXCOM Meetingand FinPower CEO Forum organised by APRACA / Seoul, Korea)

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16. Risk Management in the Midst of the Global Financial Crisis (22-05-2009 : Dr. D. Subbarao / / At the Financial Management Summit 2009organized by the Economic Times / Mumbai)

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17. Global Financial Crisis: Causes, Impact, Policy Responses and Lessons 23-04-2009 : Dr. Rakesh Mohan, Deputy Governor / / At 7th Annual India BusinessForum Conference / London Business School, London

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18. India - Managing the Impact of the Global Financial Crisis 26-03-2009 : Dr. Duvvuri Subbarao / / At the Confederation of Indian Industry's

National Conference and Annual Session 2009 / New Delhi

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19. Impact of the Global Financial Crisis on India Collateral Damage and Response 18-02-2009 : Dr. Duvvuri Subbarao / / At Symposium on "The Global EconomicCrisis and Challenges for the Asian Economy in a Changing World" / Institute for

International Monetary Affairs, Tokyo

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20. Some Reflections on the recent Global Financial Turmoil: An Indian Perspective (10-01-2009 : Ms. Shyamala Gopinath, Deputy Governor / / At the Annual Conferenceof FEDAI, Kolkata)

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21. Emerging Blueprint for Prudential Regulation: Assessment and Challenges (27-11-2009 : Smt. Shyamala Gopinath, Deputy Governor / Confluence, 2009, IIM /

Ahmedabad)

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Philosophy and Practice of Financial Sector Regulation: Space for Unorthodoxy (02-11-2009: Smt. Shyamala Gopinath, Deputy Governor / / FSA Turner ReviewConference / London)

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23. Global Agenda for Regulatory and Supervisory Reforms: The Stock Taking andWay Forward (08-09-2009 : Smt. Usha Thorat, Deputy Governor / : At the Panel Session on"Strengthening Financial Regulation and Supervision" of the FICCI-IBA Conferenceon "Global Banking : Paradigm Shift" / Hotel Grand Hyatt, Mumbai)

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24. India's Economic Transformation: A Snapshot (07-09-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the Antique India

Markets Conference 2009 / Mumbai)

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25. Emerging Contours of Financial Regulation: Challenges and Dynamics (10-06-2009 : Dr. Rakesh Mohan)

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26. Banking and Finance in India: Developments, Issues and Prospects (31-08-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the 62nd International

Banking Summer School (IBSS) / New Delhi)

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27. Financial Stability : Issues and Challenges (10-09-2009 : Dr. Duvvuri Subbarao, Governor / At the FICCI-IBA AnnualConference on 'Global Banking : Paradigm Shift' organised jointly by FICCI and IBA

/ Mumbai)

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28. Changing Dynamics of Legal Risks in Financial Sector:(30-10-2009 : Smt. Shyamala Gopinath, Deputy Governor / Symposium on Changing

Dynamics of Legal Risks in Financial Sector / Kerala )

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29. Sub-national Fiscal Reforms and Debt Management: Indian Experience 29-04-2009 : Shyamala Gopinath / / At the Workshop on 'Sub-national Fiscal Reformand Debt Management' / Washington

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30. Mobile Commerce, Mobile Banking: The Emerging Paradigm (04-12-2009 : Dr. K. C. Chakrabarty, Deputy Governor / At the India Telecom 2009Conference organized by Department of Telecom / New Delhi )

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31. GenNext Banking: Issues and Perspectives (25-11-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the Panel Discussionon GenNext Banking at the 4th International Finance and Banking Conferenceorganized by the Indian Merchant's Chamber, Mumbai )

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32. Information Technology and Banking: A Continuing Agenda (18-05-2009 : Dr. D. Subbarao / / At the Banking Technology Awards 2008 / Institute

for Development & Research in Banking Technology, Hyderabad)

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33. Technology in Banks: Responding to the Emerging Challenges 23-03-2009 : Ms. Shyamala Gopinath, Deputy Governor / / At the CII's BankingTECH Summit 2009 / Mumbai

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34. Retail Payments: Perspectives and Way Forward 19-03-2009 : Dr. Duvvuri Subbarao / At the Regional Seminar / Chennai

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35. Retail Payment Systems: Select Issues 17-03-2009 : Smt. Shyamala Gopinath, Deputy Governor / / At the Regional Seminaron Payment Systems, jointly organised by the Reserve Bank of India and Bank for

International Settlements / Mamallapuram, Chennai

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36. Lessons for Financial Policymaking: Interpreting the Dilemmas 03-03-2009 : Ms. Shyamala Gopinath, Deputy Governor / At 10th FIMMDA-PDAI

Annual Conference / Mumbai

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37. Ethics and the World of Finance (28-08-2009: Dr. Duvvuri Subbarao : / Sri Sathya Sai University, Prasanthi Nilayam /

Andhra Pradesh)

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38. International Monetary and Financial Committee Meeting 25-04-2009 : Dr. Duvvuri Subbarao / / International Monetary and FinancialCommittee Meeting / Washington D.C

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39. Dr. D. Subbarao's Interview With Central Banking Publications, London (02-07-2009 : Dr. D. Subbarao, Governor / Published on July 2, 2009 / At theCentral Banking Publications / London)

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40. Dr. D. Subbarao, Governor's Inaugural Address (02-07-2009 / At the Third Annual Statistics Day Conference of the Reserve Bank /

Mumbai)

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41. Addressing the Regulatory Perimeter Issues: Indian Experience (15-06-2009 : Smt. Shyamala Gopinath, Deputy Governor / At the Ninth Annual

International Seminar on Policy Challenges for the Financial Sector, co-hosted byThe Board of Governors of the Federal Reserve System, The IMF, and The World

Bank on "Emerging from the Crisis - Building a Stronger International FinancialSystem", June 3-5, 2009 / Washington, D.C.)

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42. Dr. Duvvuri Subbaraos Speech 01-04-2009 @ RBIs Platinum Jubilee Celebrations

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Should Banking Be Made Boring?An Indian Perspective:

(25-11-2009 : Dr. Duvvuri Subbarao, Governor : At the International Finance and

Banking Conference organized by the Indian Merchants' Chamber on 'Banking - Crisis and Beyond' : Mumbai )

One of the more influential ideas has been the thesis put forward by the noted economistand Nobel Laureate Paul Krugman that 'the way to reform banking is to once againmake it boring'.

Krugman argues that there is a negative correlation between the 'business model' of banking and economic stability.

Whenever banking got exciting and interesting, paid well and attracted intellectual talent,it got way out of hand and jeopardized the stability of the real sector. Conversely, periodswhen banking was dull and boring were also periods of economic progress.

Krugman's thesis of 'boring banking' is interesting, but also debatable.

It raises several important questions. What were the i lls of the banking system that causedthe crisis? Is making banking 'boring' a necessary and sufficient cure to those ills? And,how relevant is the 'boring banking' perspective in India?

The ills of banking system causing the crisis were(1) the repeal in the United States in 1999 of the Glass - Steagall Act ;(2) the progressive globalization of financial institutions and services leading to a

complex web of interconnected markets, institutions, services and products;(3) development of new structured products to distribute the credit risk, they also

found new special purpose entities and vehicles to handle them. The largefinancial institutions knew that their failure would result in a systemiccollapse, and that they would therefore be rescued at public cost.

(4) Finally, the asymmetric compensation structures in many financial institutionsencouraged risky behaviour. Many believe that the genesis of the crisis can be traced to the repeal in the United States

in 1999 of the Glass - Steagall Act which mandated the separation of commercial andinvestment banking to protect depositors from the hazards of risky investment andspeculation. The repeal opened up opportunities for commercial banks, investment banks,securities companies and insurance companies to consolidate, setting off a wave ofinnovation. Complex financial products were created by slicing and dicing, structuringand hedging, originating and distributing, all under the belief that real value could becreated by sheer financial engineering. The system was characterized by opacity anddissipation of information with no one having a full picture of the extent of risk, how itwas getting transmitted across the system and where it resided.

Indian banking.:

It is to be noted that even as other countries and other regions went through bankingupheavals, Indian banking remained safe. This is part of our cautious and prudentregulation, and in part of the relatively lower globalization of our banking sector. But itdoes not mean that the lessons of the crisis are irrelevant for India.

Our banking sector too will acquire an increasingly international character / presenceabroad while foreign banks will have larger presence in India. The task for the Indian


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banks is to learn to compete abroad and to set the terms of competition at home. It isimperative therefore for Indian banks to learn from the successes and failures around theworld, study international best practices and adapt them to the Indian conditions.

Boring banking is an oxymoron in the Indian case. There are four big challenges that Indian banks will need to address. Meeting these

challenges is going to demand lateral thinking, entrepreneurship and management calibre- all a far cry from anything like boring.

First Challenge : Financial Inclusion

Rough estimates indicate that of the 600,000 habitation centres in the country, only about30,000 centres are covered by commercial banks.

The RBI has taken several steps to further financial inclusion - encouraging 'no frills'accounts, Business Correspondent (BC) model and the use of mobile phones forextending banking outreach.

It is not possible to cover a country of a billion plus people, spread over 600,000habitations, covering vast distances, with poor infrastructure and sometimes inhospitableterrain by traditional brick and mortar branches.

Financial inclusion is especially valuable as it will at once promote both growth andequity. Working to meet this challenge can hardly be a boring proposition.

Second Challenge : Financing Infrastructure

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 productivesectors.

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 termfinance space is filled by insurance companies and pension and provident funds.

The burden of infrastructure financing will have to be met largely by the banks. In order to partly offset this problem, the Reserve Bank has, since 2000, allowed banks to

enter into take-out financing arrangements with other financial institutions. To facilitate financing for infrastructure, the RBI has also relaxed the exposure norms. (to

avoid concentration risk. For financing infrastructure these norms are relaxed by up to 5 per cent in the case of a single borrower and 10 per cent in the case of a borrower group.

A number of recent measures and several in the pipeline should facilitate greater flow of

credit to the infrastructure sector. A few important ones are:1. First, interest rate futures have been reintroduced recently and these should aid banks in managing their interest risk more efficiently.

2. Second, repos in corporate bonds are slated to start soon; we expect to issue finalguidelines by end-November 2009.

3. Third, in the second quarter policy review last month, we announced theintroduction of plain vanilla OTC single-name credit default swaps (CDS) forcorporate bonds for resident entities.


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4. Fourth, a separate category of NBFCs - infrastructure NBFCs - is beingintroduced. Fifth, banks will be permitted to build up capital for 'take-out'exposures in a phased manner.

5. Finally, refinancing through the special purpose vehicle, India InfrastructureFinance Company Ltd. (IIFCL), is expected to leverage bank financing for Public

Private Partnership (PPP) projects. These measures, along with existing ones, can be expected to enhance banks' ability to fund infrastructure projects.

Financing infrastructure is going to be a big challenge for the banking sector. This hugeand growing demand of infrastructure finance + finding the resources, will have to be met

by banks. Then, banks will also need to hone their skills in appraisal and management ofrisks inherent in infrastructure financing. Hence it is going to be more challenging & not

boring.

Third Challenge : Risk Management

Two big forces will define the environment in which Indian banks will be called upon tooperate: (1) a rapidly globalizing India and (2) a fiercely competitive banking industry.

Hence, Indian banks will have to upgrade their risk management architectures. In addition to managing more effectively the traditional risks such as credit risk,

operational risk and market risk, banks also need to manage some new risks that have proven to be significant such as reputation risk, counterparty credit risk, liquidity risk,interest rate risk in the banking book and incremental risks in the trading book. Riskmanagement needs to be complemented by stress testing techniques.

This calls for sharpening the skill endowment at the institutional level. As of March 2009, all Indian banks have migrated to the simpler approaches of the Basel

II standard. The task on the way forward is to graduate to more advanced approaches.Towards this end, in consultation with banks, the Reserve Bank has now finalized a four-year time frame starting in April 2010 and ending with March 2014.

Moving to advanced approaches is both skill and technology intensive. In the firstinstance, it will therefore necessarily have to be confined to the larger banks.

Risk management is going to involve pushing the frontiers of knowledge andtransforming that knowledge to practical policy. That can hardly fit the description of

boring.

Fourth Challenge : Further Improvements in Efficiency

The growth acceleration of the Indian economy during 2003-08 is attributable to a host offactors. Some of these are tangible such as the deregulation of the industrial sector,liberalization of external trade and external finance, reform of direct and indirect taxation

and elimination of controls on doing business. Some of the factors that contributed togrowth are intangible such as improved productivity, higher efficiency and growingentrepreneurism.

The contribution made by the financial sector by way of larger and better quality financialintermediation that raised the level of aggregate savings and channelled them toinvestment.

The rapid expansion of credit has been accompanied by a significant improvement inasset quality which is now close to international norms.


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The analysis in the Reserve Bank's Report on Currency and Finance 2006-08 shows thatthe Indian banking sector has recorded an impressive improvement in productivity overthe last 15 years; many of the productivity / efficiency indicators have moved closer tothe global levels. The Report also shows that the performance of public sector bankshas converged with that of new private sector and foreign banks . More interestingly,

contrary to popular perception, there is also no significant relationship betweenownership and efficiency - the most efficient banks straddle all three segments - publicsector banks, private sector banks and foreign banks.

The intermediation cost in India is still high, largely due to high operating costs. Non-interest sources of income constitute a very small share in total income of banks in

India. Although overall efficiency and productivity have improved, resources are not being

utilised in the most efficient manner. There is a degree of stickiness and non-transparencyin bank lending rates.

The challenge for Indian banks, therefore, is to reduce costs and pass on the benefits to both depositors and lenders. This will involve constantly reinventing business models anddesigning products and services demanded by a rapidly growing and diversifyingeconomy.

this means that Indian banks will need to improve efficiency even as their costs of doing business go up. This is a challenge that will test ingenuity, perseverance, ability to learnand adapt and management skills. And this is going to be anything but boring.

Conclusion

The four challenges that the banking sector has to meet head on are deepening financialinclusion, financing infrastructure, strengthening risk management and improvingefficiency. These are formidable challenges, and meeting them is going to be an exciting,rewarding and fulfilling opportunity.

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Financial Inclusion:Challenges and Opportunities

(09-12-2009 / Dr. Duvvuri Subbarao, Governor / At the Bankers' Club / Kolkata)

Financial Inclusion is important simply because it is a necessary condition for sustainingequitable growth. However, only 40 per cent of the population across the country has

bank accounts. Banks must look at the opportunity at the bottom of the pyramid and move into financial

inclusion in a big way. Financial inclusion will make it possible for governments to make payment such as social

security transfers, National Rural Employment Guarantee Programme (NREGA) wagesinto the bank accounts of beneficiaries through the 'Electric Benefit Transfer' (EBT)method.

From the demand side, the big barriers are the lack of awareness about financial servicesand products, limited literacy, especially financial literacy of the populace, and social

exclusion. From the supply side, the main barrier is the transaction costs that the bankers perceive. Furthermore, lack of communication, lack of infrastructure, language barriersand low literacy levels all raise the cost of providing services and inhibit bankers fromtaking initiative from the supply side.

On way forward, the lead bank in each district has been asked for ensuring that allvillages will have access to financial services through a banking outlet, not necessarily a

bank branch, by March 2011. All commercial banks will be asked to come up with plansfor financial inclusion by March 2010. RBI is going to ask all banks to include criteria onfinancial inclusion in the performance evaluation of their field staff. It is for the banks toconvert what they see as a dead-weight obligation into an exciting opportunity and moveon aggressively on financial inclusion.

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Furthering Financial Inclusion through Financial Literacy andCredit Counseling

(30-11-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the launch of Federal Ashwas

Trust on November 30, 2009 in Kochi / Kerala) Lack of literacy in general and financial literacy in particular, are the main hurdles in

expanding the coverage of financial services to the poorer segments of society. The process of financial education through literacy centers could benefit the Banks as the

centers while interacting with customers would be in a much better position to understandtheir specific requirements.

Counseling can also help solve current financial problems, create awareness about thecosts of misusing a credit, can improve financial management and help develop realisticspending plans.

Debt counseling / credit counseling can be both preventive and curative. In case of preventive counseling, the centers could provide awareness regarding cost of

credit, availability of backward and forward linkages, where warranted, etc. The objectives of Financial Literacy and Credit Counseling Centers (FLCC) are to provide financial counseling services, to educate about various financial products &services available from the formal financial sector, to formulate debt-restructuring plansfor borrowers.

The FLCCs should give due emphasis to customers' rights under fair practices code andact as watchdogs.

The Bank, based on the experience gained, may like to consider opening more suchcenters in other districts of the State in due course as the benefits of such initiatives flow

back to the banks.

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Pushing Financial Inclusion:Issues, Challenges and Way Forward

(17-07-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At 20th SKOCH Summit 2009 /

Mumbai ) People having Annual Income less than Rs.50,000 bracket are still heavily dependent on

money lenders and very few of them have bank accounts, though they are bankable. The reasons for this financial exclusions are absence of technology, delivery mechanism, business model and reach and coverage.

To give push to Financial Inclusion , it is essential to focus on:1. Inclusive growth,2. Domestic consumption and investment,3. Increased social sector spending,4. Giving benefits to poor clients and reduction of cost,5. Implementing the Report of the Financial Inclusion in India, 2008 and adopting

appropriate technology and efficient delivery model.

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Banking:Key Driver for Inclusive Growth

(10-08-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the Mint's 'Clarity Through Debate' series / Chennai )

There are still large segments of the society that remain outside the financial system. There are over 3 million SHGs in India.

Only 22 per cent of the SHGs were provided with bank finance for undertaking incomegenerating activities including micro enterprises. This has been attributed to failure of public intervention to enhance the credit absorption

capacity of SHGs as well as to the failures of credit delivery systems to reach the poor. To address the problem of high transaction cost and outreach, the banks can increasingly

use Information Technology based solutions. The Financial Inclusion Fund (FIF) and Financial Inclusion Technology Fund (FITF) can be used to render promotional support for SHGs and other grass root level institutions.

Thus, financial inclusion along with the Governmental developmental programmes willlead to an overall financial and economic development in our country and as in the casefor most developing countries, extending the banking services to everyone in the countrywill be the key driver towards an inclusive growth.

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Sustaining Growth Potential :Focus on Key Sectors

(11-09-2009 : Smt. Usha Thorat, Deputy Governor / / At the Inaugural Session of the

"Conclave of CEOs and CFOs" organised by Institute of Public Enterprise & NMDC Ltd.,CII (AP) & CEO Clubs India / Hyderabad )

The growth rate of 8.8 per cent average in the Indian economy during 2003-08 is thehighest ever recorded.

The policy of financial inclusion is critical for greater capital formation to ensure higherand sustained growth.

There is also a need to address the non credit issues in agricultural credit, credit and credit plus issues in Micro and Small Enterprise (MSE) financing and a variety of innovativerisk mitigants in infrastructure financing to make sure that the Indian banking system can

play its due role in capital formation in these three vital sectors of the economy so criticalfor sustainable inclusive growth.

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Emerging Market Concerns:An Indian Perspective

(05-10-2009 : Dr. Duvvuri Subbarao, Governor / / At G-30 International Banking Seminar / Istanbul)

From the perspective of Emerging Market Economies (EMEs) and particularly for that ofIndia, concerns arise for -

Timing of exit from the accommodative monetary policy in the context of rising food price-led inflation but still weak growth;

The possibility of another surge in capital flows, especially if we turn out to be an outlierin withdrawal of monetary stimulus;

Monetary transmission mechanism as it is evolving from the crisis period; Return to fiscal consolidation and quality of fiscal adjustment; and The implications of the efforts towards financial stability on financial inclusion and

growth.

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Technology, Financial Inclusion and Role of Urban CooperativeBanks

(09-08-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At Foundation Day and

Inauguration of the 'Core Banking Solution Project' of the A. P. Mahesh Co-op Urban Bank Ltd. / Hyderabad )

It is highly desirable that underbanked people should be brought into the banking fold. The UCBs have to take a lead and play a more pro-active role. The challenge lies in taking greater advantage of new technologies and information-based

systems. IDRBT is being asked to facilitate UCBs availing of Core Banking Platform on an

Application Service Provider (ASP) model. With this, the UCBs will be able to put in place cost-effective, modern technology. They need to redesign their business strategies to incorporate specific plans to promote

financial inclusion of low income group.

Mobile phones, POS terminals, 'simple to use' cash dispensing and collecting machinesakin to ATMs, etc. with operating instructions and commands in vernacular languagewould greatly facilitate the financial inclusion of the semi-urban populace at an affordablecost, and cooperative banks with a local touch and feel can address these issues in a bigway.

Reserve Bank's focus is also geared towards facilitating the process of computerization inUCBs. Financial Inclusion as a holistic benchmark of a country's advancement and itscommitment to meet the aspirations of its disadvantaged franchisee is a 'Goal' to pursue

by all the concerned players.

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Global Financial Crisis and Monetary Policy Response in India

(12-11-2009 : Mr. Deepak Mohanty, Executive Director / / At the 3rd ICRIER-InWEnt Annual Conference / New Delhi)

An important lesson learnt, post-September 2008, is that irrespective of the degree ofglobalization of a country and the soundness of its domestic policies, a financial crisiscould spread to every economy.

The impact of the global financial crisis unfolded in the Indian financial markets, throughreversal of capital inflows and significant correction in the domestic stock markets on the

back of sell-off in the equity market by the foreign institutional investors (FIIs). The banking sector was not affected as it had hardly any direct exposure to sub-prime

assets. The deceleration in growth in industrial output in Q4 of 2008-09 was noticeable in

negative growth of -0.5% (y-o-y). The transmission of external demand shocks was swift and severe on export growth and

the growth in government final consumption expenditure registered a sharp increase. By synchronizing the liquidity management operations with those of exchange rate

management and non-disruptive internal debt management operations, the RBI ensuredthat appropriate liquidity was maintained in the system.

The balance of judgment at the current juncture is that it may be appropriate to sequencethe 'exit' in a calibrated way so that while the recovery process is not hampered, inflationexpectations remain anchored. The 'exit' process can begin with the closure of somespecial liquidity support measures."

To sum up, despite sound fundamentals and no direct exposure to the sub-prime assets,India was affected by global financial crisis reflecting increasing globalization of theIndian economy.

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Financial Crisis and Beyond

(10-11-2009 : Smt. Shyamala Gopinath, Deputy Governor : At the 3rd India-China Finance Conference : Mumbai)

In terms of the two crucial soundness indicators, viz., capital and asset quality, the Indian banking sector has exhibited resilience amidst testing times.

In line with the discernible improvement in the economic outlook globally as also inIndia, attention has shifted from managing the crisis to managing the recovery.

RBI withdrew certain special liquidity support measures like : (a) The SLR and the limitfor export credit refinance facility were restored the pre-crisis level. (b) The two non-standard refinance facilities: (i) special refinance facility for scheduled commercial banksand (ii) special term repo facility for scheduled commercial banks have been discontinuedwith immediate effect.

India is actively confronted with an upturn in inflation due to its unique features like Indiahas been a supply constrained economy and has the challenge of reviving domesticconsumption and investment demand.

India is also an emerging economy with twin deficits - fiscal and current account deficits. Capital flows in India have resumed and problems associated with a synchronous

tightening of monetary policy, viz., exit from the expansionary policy earlier than others,can be especially relevant for emerging market economies like India.

Stability in the financial sector and a sound systemic oversight framework is the best wayto provide a necessary buffer to undertake the task of financial empowerment in the truesense.

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Learning from Crises(16-10-2009 : Mrs. Usha Thorat, Deputy Governor / 'Institute of Banking and Finance(IBF) Distinguished Speaker Series' lecture / Singapore )

The major learning from the global crisis is that globalization has meant that no country isimmune from the happenings in global financial markets.

The shock has impacted both the financial and real sectors although it was financial sectorled.

The Regulators have to be concerned about the real sector and recognize that financialsector development is not a goal by itself but is intended to enable the growth, not just ofthe rich, but more importantly inclusive growth cutting across all segments of the societyand regions.

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Global Crisis:Genesis, Challenges and Opportunities Unleashed

( 25-09-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the 21st Anniversary

Convention of the Association of Professional Bankers / Colombo, Sri Lanka ) Global crisis has tested the competence and conventional wisdom of policy makers, bankers and market participants all around the world.

In view of the strong interactions between the financial system and the real economy, afinancial crisis often gives rise to an "adverse feedback loop" in the view of which

policies in the advanced economy have aimed at addressing both financial stress and theeconomic recession.

Lower interest rates, ample liquidity and fiscal stimulus have been used to contain theadverse real effects; while for restoring stability to the financial system, measures likeraising the capital of banks and financial institutions and addressing the impaired assetshave been adopted.

For countries like India and Sri Lanka, the growth opportunities are almost limitless,given our current levels of development from where we have to catch up with the welfareand income levels of the advanced economies.

Large sections of the population contribute much below their potential because of lack ofopportunities, and if the policy environment could recognize the gaps and provide theright opportunities with appropriate incentives, the growth prospects could improvesignificantly.

However, global crisis of this magnitude does not help in creating and expandingopportunities for around more than 2 billion population in the world, who live underabject poverty.

That is why countries like India and Sri Lanka must demand a better global governancesystem to manage the challenges of globalization.

Much of the prosperity in market economies has been possible because of the animalspirit, and regulations should not suppress animal spirit, just because of the potential risksof instability and crisis.

***


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Global Financial Crisis:Questioning the Questions

(31-07-2009 : Dr. D. Subbarao, Governor / / At the Meeting of The Associated Chambers

of Commerce and Industry of India / New Delhi ) At the heart of the crisis were two root causes - the buildup of global imbalances and

developments in the financial markets over the last two decades. Global imbalances have been, are, and will continue to be inevitable. Given that global imbalances are inevitable, how do we ensure that they do not build up

to destabilizing levels? Monetary policy will have to be conducted in a regime of large and continuing structural

fiscal deficits. The Reserve Bank needs to roll back the special monetary accommodation. For this to happen, the government will have to flesh out the road map for fiscal

consolidation.

The crisis has shown that both are critical for macroeconomic stabilization. The right question is : how can we coordinate fiscal and monetary policies to achieve the planned outcomes?

In a more global context, given the fall out from the crisis, to ask how central banksshould revert to their sole inflation targeting mandate is the wrong question.

The right question is this : what are the specific roles and responsibilities of governmentsand central banks in ensuring price stability, financial stability and macroeconomicstability?

The financial sector has no standing of its own; it derives its strength and resilience fromthe real economy.

To the extent that the financial sector helps deliver stronger and more secure long-termgrowth, its development is important.

And our regulatory framework should be premised on this underlying argument. The question we need to answer is whether an existing practice or a change in ruledelivers higher and more secure real economy growth ?


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Challenges for the Central Banks

{ 14-08-2009 : Dr. D. Subbarao, Governor (Shri M. Narasimham, Dr. C. Rangarajan, Dr.Y. V. Reddy - Former Governors) / / At Taj Krishna Hotel / Hyderabad }

Shri M. Narasimham - The challenge for the central banks in future would be to carryalong the market participants through transparent and clear communication policies ratherthan taking them by surprise.

Dr. C. Rangarajan - Price stability is important as it reduces uncertainty about the future, promotes savings and investments and helps to reduce poverty.

Dr. Y. V. Reddy - Countercyclical approaches to prevent asset price bubbles needed torecognise the issue of trade and financial cycles, on which the domestic policy might notreally have control.

Dr. D. Subbarao - The first challenge for central banks around the world and in India wasto conduct monetary policy in coordination with fiscal policy, but without becominghostage to fiscal compulsions. There is also a need to define the mandate of central banksand reforming the regulatory structures to get an optimum balance of liberalisation andregulation and to conduct monetary policy in a globalised environment.

*** Impact of global financial crisis on RBI as a National Regulator

(29-06-2009 : Smt. Usha Thorat, Deputy Governor / / At the 56th EXCOM Meeting and FinPower CEO Forum organised by APRACA / Seoul, Korea )

The crisis had knock on effects on the country in three ways , viz. reduction in foreignequity flows, tightening access to overseas lines of credit and fall in global trade andoutput.

The cumulative impact of this was a slowing down of output and employment. While the RBI responded to the situation by selling dollars consistent with its policyobjective of maintaining orderly conditions in the foreign exchange market, it startedaddressing the liquidity pressures through a variety of measures.

Recognizing that the unexpected and swift turn of events could lead to problems of aspiraling downturn, the RBI also took a series of regulatory measures.

The RBI took sector-specific measures to alleviate the stress faced by employmentintensive sectors such as SME, export and housing.

The inherent synergies in its multiple roles enabled the RBI to ensure orderly functioningof money, forex and government securities markets.

Both, macro prudential and micro prudential policies adopted by the RBI have ensuredfinancial stability and resilience of the banking system

Finally, the close coordination and interaction between the Government and the RBIensured that appropriate package of measures were put in place promptly to deal with thecrisis and restore the growth momentum.

***


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Risk Management in the Midst of the Global Financial Crisis

(22-05-2009 : Dr. D. Subbarao / / At the Financial Management Summit 2009 organized by the Economic Times / Mumbai)

The global economy is passing through its deepest financial and economic crisis of ourtime.

The challenge is how we manage the recovery. While the Reserve Bank will continue to support liquidity in the economy, it will have to

ensure that as economic growth gathers momentum, the excess liquidity is rolled back inan orderly manner.

The challenge for fiscal policy is to balance immediate support for the economy with theneed to get back on track on the medium term fiscal consolidation process.

Beyond monetary and fiscal policies, preserving financial stability is the key tonavigating these uncertain times.

The CFSA * found that our financial system is essentially sound and resilient, and thatsystemic stability is by and large robust. { * Committee on Financial Sector Assessment(CFSA)}

CFSA also carried out single-factor stress-tests for credit and market risks and liquidityratio and scenario analyses.

These tests show that there are no significant vulnerabilities in the banking system. The Reserve Bank intends to formalize this process. With the right mix of macroeconomic policy and corporate strategy, we will emerge from

this global recession stronger than before.


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Global Financial Crisis:Causes, Impact, Policy Responses and Lessons

23-04-2009 : Dr. Rakesh Mohan, Deputy Governor / / At 7th Annual India Business

Forum Conference / London Business School, London The current ongoing global financial crisis has had its roots in the excessively

accommodative monetary policy and lax lending standards in US. Following the Lehman failure, there were large capital outflows by portfolio investors

with concomitant pressures in the foreign exchange market. Indian banking system is, however, not displaying any distress. The financial sector, especially banks, is subject to prudential regulation. The CRAR of all scheduled commercial banks taken together was 13.0 per cent at end-

March 2008, well-above the regulatory requirement of 9 per cent. A more rigorous assessment of the health of commercial banks, recently undertaken by

the Committee on Financial Sector Assessment shows that the commercial banks are

robust and resilient and can withstand significant shocks arising from large potentialchanges in credit quality.

Various policy actions by the Reserve Bank since mid-September 2008 have been aimedat offsetting the contraction caused to its balance sheet due to fall in its foreign assets.

For a variety of factors, bank lending rates are expected to exhibit only a gradualsoftening.

It is important that banks and other financial sector players are well-regulated. A host of other issues such as accounting, auditing and compensation have also received

attention in the aftermath of the global financial crisis. However, in view of the fast pace of technological and financial innovations, regulatory

authorities would have to follow an approach that would have to be dynamic and adjust inresponse to changing economic environment.


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India - Managing the Impact of the Global Financial Crisis

26-03-2009 : Dr. Duvvuri Subbarao / / At the Confederation of Indian Industry's NationalConference and Annual Session 2009 / New Delhi

India has been impacted by the crisis due to rapid and growing integration into the globaleconomy.

The contagion of the crisis has spread to India through all the channels - the financialchannel, the real channel, and the confidence channel.

The Reserve Bank's policy response was aimed at containing the contagion from theoutside.

This marked a reversal of Reserve Bank's policy stance from monetary tightening tomonetary easing and moderation in growth in the current cycle.

The Central Government invoked the emergency provisions of the FRBM Act to seekrelaxation from the fiscal targets and launched two fiscal stimulus packages.

It is the Reserve Bank's expectation that commercial banks will take the signal from the policy rates reduction to adjust their deposit and lending rates in order to keep creditflowing to productive sectors.

The government's fiscal stimulus should be able to supplement these efforts from bothsupply and demand sides.

Once the global economy begins to recover, India's turn around will be sharper andswifter, backed by our strong fundamentals and the untapped growth potential.

Meanwhile, the challenge for the government and the RBI is to manage the adjustmentwith as little pain as possible.


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Impact of the Global Financial Crisis on India Collateral Damageand Response

18-02-2009 : Dr. Duvvuri Subbarao / / At Symposium on "The Global Economic Crisis

and Challenges for the Asian Economy in a Changing World" / Institute for International Monetary Affairs, Tokyo

The global economic outlook deteriorated sharply over the last quarter. IMF made a marked downward revision of its estimate for global growth to 0.5 per cent

in January 2009. Great Recession of 2008/09 is going to be deeper and the recovery longer. India has been

hit by the crisis, despite mitigating factors, due to its rapid and growing integration intothe global economy.

How Has India Been Hit By the Crisis? The contagion of the crisis has spread to India through all the channels - the financial

channel, the real channel, and the confidence channel.

Let us first look at the financial channel . India's financial markets - equity markets,money markets, forex markets and credit markets - had all come under pressure from anumber of directions.(1) First , as a consequence of the global liquidity squeeze, Indian banks and corporates

found their overseas financing drying up, forcing corporates to shift their creditdemand to the domestic banking sector. Also, in their frantic search for substitutefinancing, corporates withdrew their investments from domestic money marketmutual funds putting redemption pressure on the mutual funds and down the line onnon-banking financial companies (NBFCs) where the MFs had invested a significant

portion of their funds. This substitution of overseas financing by domestic financing brought both money markets and credit markets under pressure.

(2) Second , the forex market came under pressure because of reversal of capital flows as part of the global deleveraging process. Simultaneously, corporates were convertingthe funds raised locally into foreign currency to meet their external obligations. Boththese factors put downward pressure on the rupee.

(3) Third , the Reserve Bank's intervention in the forex market to manage the volatility inthe rupee further added to liquidity tightening.

Now let me turn to the real channel . Here, the transmission of the global cues to thedomestic economy has been quite straight forward - through the slump in demand forexports. The United States, European Union and the Middle East, which account for threequarters of India's goods and services trade are in a synchronized down turn. Serviceexport growth is also likely to slow in the near term as the recession deepens and financialservices firms - traditionally large users of outsourcing services - are restructured.Remittances from migrant workers too are likely to slow as the Middle East adjusts tolower crude prices and advanced economies go into a recession.

The crisis also spread through the confidence channel . In sharp contrast to globalfinancial markets, which went into a seizure on account of a crisis of confidence, Indianfinancial markets continued to function in an orderly manner. Nevertheless, the tightenedglobal liquidity situation in the period immediately following the Lehman failure in mid-September 2008, coming as it did on top of a turn in the credit cycle, increased the riskaversion of the financial system and made banks cautious about lending.


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Despite not being part of the financial sector problem, India has been affected by thecrisis through the pernicious feedback loops between external shocks and domesticvulnerabilities by way of the financial, real and confidence channels.

Both the Government and the Reserve Bank of India responded to the challenge in closecoordination and consultation.

The main plank of the Government response was fiscal stimulus while the Reserve Bank'saction comprised monetary accommodation and counter cyclical regulatory forbearance.

These measures have ensured that the Indian financial markets continue to function in anorderly manner.

Our response has been predominantly driven by the need to arrest moderation ineconomic growth.

Notwithstanding the severity and multiplicity of the adverse shocks, India's financial markets have shown admirable resilience. (Resilience meaning: The physical property of a material that can return to its original shape or position afterdeformation that does not exceed its elastic limit)

Once the global economy begins to recover, India's turn around will be sharper andswifter.


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Some Reflections on the recent Global Financial Turmoil:An Indian Perspective

(10-01-2009 : Ms. Shyamala Gopinath, Deputy Governor / / At the Annual Conference of

FEDAI, Kolkata) RBI has taken a series of measures to augment forex and domestic liquidity. Some of the

measures taken to augment forex liquidity are: USD dollar swap lines of up to USD10 billion for Indian banks with overseas

branches and subsidiaries. The actual utilisation, as of January 9, 2009 is only USD247 million .

Increasing interest rate ceilings for FCNR(B) and NRE deposits to LIBOR / SWAPrates plus 100 basis points and LIBOR / SWAP rates plus 175 basis pointsrespectively.

ECB policy, which is an instrument of capital account management, has beenliberalised to revert to the pre-May 2007 period. It may be recalled that due to large

capital flows, the end use of ECB proceeds was limited to foreign currencyexpenditures. Further liberalisation in terms of expanding eligible borrowers and enduse has also been undertaken viz :

o Housing Finance Companies, registered with National Housing Bank (NHB)have been permitted to raise short-term foreign currency borrowings

o NBFCs, which are exclusively involved in financing of the infrastructuresector, may avail of ECBs from multilateral / regional financial institutionsand Government owned development financial institutions for on-lending tothe borrowers in the infrastructure sector under the Approval route.

o Payment for obtaining license / permit for 3G Spectrum will be considered aneligible end-use for the purpose of ECB.

o The corporates in the Hotels, Hospitals and Software sectors to avail of ECBup to USD 100 million per financial year, under the Automatic Route, forforeign currency and / or Rupee capital expenditure for permissible end-use.

o Spreads on ECBs and trade credits were increased and the all-in-cost ceilingson ECBs were dispensed with under the Approval route.

Limit on overseas borrowings by banks was enhanced from 25 percent to 50 percentof unimpaired Tier I capital. Overseas borrowings for on-lending to exporterscontinue to remain outside the ceiling.

In order to enable EXIM bank to continue to offer buyers credit against lines of creditas well as preshipment and post shipment finance, RBI has extended a line of credit ofRs.5000 crore.

EXIM is also eligible to avail of swap facility up to USD 1 billion under the facility permitted for banks.

The FII limit for investment in corporate bonds has been hiked to USD 15 billionfrom USD 6 billion.

Deputy Governor touched upon the big picture and underlined some lessons that can bedrawn from the crisis.

Any future financial market reform measure and introduction of new innovations / products must be preceded by an assessment of the resultant leverage for the system inquantifiable terms.

Financial sector entities need to be seen and regulated as risk repositories in the system.


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The increasing focus on holistic approach towards regulation of financial entities resultedin the shadow banking system made up of unregulated SIVs and conduits leading to risktransfers which could have systemic implications.

Well regulated counterparties reduce potential for disruption in financial markets. FEDAI has been urged to suggest a framework for complex products.

All authorised dealers are also urged up on to become members of the FEDAI andexecute an undertaking to the effect that they would abide by the terms and conditionsstipulated by the FEDAI for transacting foreign exchange business.

***


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Emerging Blueprint for Prudential Regulation:Assessment and Challenges

(27-11-2009 : Smt. Shyamala Gopinath, Deputy Governor / Confluence, 2009, IIM /

Ahmedabad) In the post-crisis period, the emerging global consensus is increasingly supporting

regulatory actions that will strengthen prudential regulation both at the macro and atmicro level that will need to be integrated appropriately into the national regulatoryregimes over time.

Macro-Prudential Regulation

The objective of the overlay of the macro prudential framework is to contain the risk ofsystemic contagion.

On interconnectedness, an institution is clearly systemic if it is a dominant player in the

inter-bank market or other funding and derivatives markets. There is therefore a proposal to levy a " systemic capital charge " on banks andinstitutions that pose potential systemic risks.

There is no international insolvency framework for financial firms and a limited prospectof one being created in the near future.

To prevent weakness in one institution affecting the entire financial system, a pre-plannedresolution mechanism should ensure winding down of the problem in an orderly manner,only affecting the shareholders or at best the creditors, but not taxpayers in general.

Recognizing the risks in over leverage and in view of the fact that risk models cannotcapture risks with absolute precision, the risk based capital adequacy is proposed to beunderpinned by an internationally harmonized leverage ratio.

Both prudential regulations and accounting standards have increased pro-cyclical behavior among banks. There is a consensus on the establishment of a capital buffer above the minimum that ismet or exceeded in good times.

Dynamic provisioning* is that it makes the balance sheets less vulnerable to cyclicalfluctuations however, the accounting fraternity critics such provisioning as it is misusedfor profit smoothing. * (The fundamental principle underpinning dynamic provisioning is that provisions aremade against all outstanding loans based on an estimate of forward looking expected lossinstead of incurred losses. The benefit is that such provisioning would make the balancesheets less vulnerable to cyclical fluctuations. The foremost critique of the aboveapproach has come from the accounting fraternity which interprets this as an instrumentwhich can be potentially misused for profit smoothing. However, post crisis there isgreater appreciation of the prudential benefits of dynamic provisioning even fromaccounting standard setters. It should be possible to have inbuilt checks and balances toensure that the potential misuse is minimized. )


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Micro Prudential Regulation

In addition to increasing the minimum level of capital, the regulatory capital requirementwould now also emphasizes:(b) Extending the coverage to include securitization activities and complex financial

instruments , all off-balance sheet activities and trading book exposures - therebymaking the coverage as comprehensive as possible,

(c) Enhancing the quality of capital buffer by including only common equity and reservesunder Tier 1 capital.

Adequate capital without adequate liquidity cannot save a bank from illiquidity spirals inthe markets.

The IASB and FASB have issued a joint statement reaffirming their commitment to worktowards convergence to a single set of high quality global standards.

{International Accounting Standards Board (IASB).} {US Financial AccountingStandards Board (FASB)}

Indian Experience

Our overall regulatory framework and the specific regulatory measures played animportant role in preventing instability in the Indian banking system during the globalfinancial crisis in particular, and in avoiding any banking crisis in general in the past.

Conclusion

The origins of next crisis may come from yet unidentified exogenous sources or themacroeconomic framework or macro-imbalances but the emerging blueprint for

prudential regulation is aimed at preparing the system to adjust itself in a non-disruptivemanner.

***


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Philosophy and Practice of Financial Sector Regulation:Space for Unorthodoxy

(02-11-2009: Smt. Shyamala Gopinath, Deputy Governor / / FSA Turner Review

Conference / London) The clarity, conviction and clinical sharpness of arguments one encounters while reading

the Turner review ask of us a very fundamental question - how could the world not haveexpected this crisis ? How could the policy regimes world over, barring a few exceptions,failed to even recognize what now seems to be obvious?

Historically, the Indian financial system has been a bank dominated one. The bank-based financial system had come in for sharp criticism in the wake of the Asian

crisis, but the recent crisis has again brought the centrality of banks in a financial systeminto focus, irrespective of the form of the financial market model.

Broadly speaking, the evolution of regulatory framework for financial sector entities has been intrinsically derived from the objective of financial stability.

In respect of the prudential framework for banks, while there was a commitment to movetowards the international prudential standards for banks, in many areas a more contextual approach was adopted in India keeping in view the idiosyncratic and systemic concerns

Counter cyclical measures were first taken when risk weights and provisioning oncertain segments were increased on account of rapid credit growth in thesesegments leading to concerns about potential impact of asset price bubbles andimpact on credit quality.

Banks are required to hold a minimum of 25 percent of their liabilities in the formof liquid domestic sovereign securities.

The credit conversion factors (CCF) used for calculating the potential future creditexposure for off-balance sheet interest rate as well as exchange rate contracts weredoubled across all maturities in 2008.

Banks were encouraged to build floating provisions as a buffer for the possiblestress on asset quality later.

In regard to wholesale funding markets, prudential limits were placed onaggregate inter-bank liabilities for banks as a proportion of their net worth.

To reduce systemic risk, investments by banks in subordinated debt of other banksare assigned 100% risk weight for capital adequacy purpose.

There are limits on the proportion of wholesale foreign currency liabilitiesintermediated through the banking system.

The incremental credit-deposit ratio of banks is monitored as part of the macro prudential framework

While the repair of the banking system, through a strengthened prudential framework, hasseen progress, the much needed reform of the financial markets must be the next focusarea for global oversight bodies, particularly the G20 and the FSB.

However, what our experience till now has shown is that a more common-sensicalapproach, less driven by a doctrinaire mindset; clear prioritization of objectives andstudied caution while replicating models successful elsewhere will be reliable guideposts.


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Global Agenda for Regulatory and Supervisory Reforms:The Stock Taking and Way Forward

(08-09-2009 : Smt. Usha Thorat, Deputy Governor / : At the Panel Session on

"Strengthening Financial Regulation and Supervision" of the FICCI-IBA Conference on"Global Banking : Paradigm Shift" / Hotel Grand Hyatt, Mumbai )

Cross-border bank funding has been disrupted as the banking crisis in Western Europeintensified.

In order to overcome the crisis the Basel Committee has introduced new trading bookcapital rules that substantially raises trading book capital requirements. It prescribeshigher capital requirements for resecuritisations and exposures to off-balance sheetvehicles. It has evolved principles for stress testing and valuation of complex products, asalso for supervision and management of funding liquidity risk. It has incorporated theFSB compensation standards into the Pillar 2 supervisory review process and hasenhanced Pillar 3 disclosures focusing on trading activities, securitisations and exposures

to off-balance sheet vehicles. The G 20 Finance Ministers and Central Bank Governors issued a statement reaffirmingtheir commitment to strengthen the financial system to prevent the build-up of excessiverisk and future crises and support sustainable growth. The Group took note of the actionstaken so far by FSB including introduction of CCPs to clear most credit default swaps,stronger oversight regimes for credit rating agencies, internationally agreed principles forthe oversight of hedge funds, good practices for due diligence by asset managers wheninvesting in structured finance products, and issuance of internationally agreed principlesfor regulation of short selling.

A number of measures based on the principles that are now accepted internationally, werealready brought into practice even before the crisis in India.

These included:o Restrictions on leverage for banking and non banking institutions,o stringent liquidity requirements, counter cyclical prudential measures,o not recognising in Tier I capital many items that are now sought to be deducted

internationally,o recognising profits from sale of securitised assets to SPVs over the life of the

securities issued,o not reckoning unrealised gains in earnings or in Tier I capital.

The challenge for us is to facilitate the growth of the real sector through financial products and innovations subject to adequate safeguards and adoption of sound riskmanagement policies.

For further strengthening financial regulation and supervision, the following measures areunder the consideration of RBI :

Based on July 2009 final documents from BCBS on enhancements to Basel IIframework, further guidelines relevant to standardized method are being issued.

A draft circular detailing the modalities for adopting the integrated liquidity riskmanagement system as also the guidance note on 'Liquidity Risk Management'

based on Basel Committee's 'Principles for sound liquidity risk management andsupervision' brought out in September 2008 as well as other international best

practices will be put up on the Reserve Bank website by October 31, 2009.


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As part of developing financial market infrastructure, recently, capital adequacynorms for CCPs have been laid down. CCIL's role is being gradually extended tothe OTC interest rate and forex derivatives segment, initially as a reporting

platform and thereafter, covering the settlement aspect. Additional guidance on securitisation focusing on a minimum lock-in-period and

minimum retention criteria for securitising the loans originated and purchased by banks is proposed to be issued shortly.

Recently, regulatory and supervisory framework for financial conglomerates has been reviewed for enhancing the regime. The enhancements would be put inoperation shortly.

RBI would shortly be issuing a draft Discussion Paper on prudential issues in banks' floating and managing private pools of capital in order to sensitize banksabout risks inherent in such activities and limit such exposures commensuratewith their risk management and available capital.

As indicated in the Annual Policy Statement announced in April 2009, theReserve Bank would recommend the implementation of the sound procedures /

principles being developed by the FSB for financial institutions regarding thecompensation packages.

There has been significant progress in the area of convergence of accountingstandards. The Indian accounting standards are expected to be fully convergentwith IFRSs with effect from April 1, 2011. Reserve Bank of India is activelyworking with the Government, accounting standard bodies and banks for ensuring

preparedness for smooth convergence by the banking system. The agenda that is being developed for strengthening of financial sector regulation and

supervision is ambitious. Contentious issues will arise both at national and at the international levels on regulatory

cooperation. Whereas the principles underlying this regulatory overhaul are being increasingly

accepted, many challenges will arise on their practicality and modes of implementation :(a) Firstly, there is a need to ensure that regulators and supervisors remain firm in their

resolve to ensure that there is no build-up of risk in the system and that the principlesand framework articulated are adhered to in letter and spirit.

(b) Second, the interconnectedness of the institutions and markets requires central banks, banking and securities regulators to work in close coordination with full exchange ofinformation and frequent interaction to assess the systemic risks at any point of time.

(c) Third, several of the countercyclical proposals are dependent on the assessment ofeconomic and banking conditions in national jurisdictions which will determine thecapital buffer requirements - these will obviously vary from one jurisdiction toanother as cycles would also vary. With banks operating across the globe, this willimply that capital requirement could vary across jurisdiction - parking the transaction

in a more favourable jurisdiction cannot be ruled out. Coupled with complexstructures and differential tax regimes, minimising regulatory and tax arbitrage willcontinue to be a huge challenge

(d) Fourth, cross border resolution issues will continue to be daunting especially asnational regulators will seek to protect domestic depositors and stake holders.

(e) Fifth, convergence toward international accounting standards will be a huge challengein terms of not only bringing in the changes in standards that are appropriate for thecountry but also for putting in place systems and capabilities to facilitate convergence.


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Issues such as putting in place prudential filters for not distributing unrealised gainswould also arise.

(f) Sixth, while there are discernible signs of recovery in the global financial markets, thereal test of the resilience of the financial system will be its performance through theexit process. For the emerging market economies such as ours, the challenge will be

to manage the impact of this process of global stabilisation.(g) Seventh, in emerging markets such as India, without sufficient historical data of credit

and default cycles, there are difficulties in putting in place many of the advancedmethodologies under the regulatory framework such as expected loss provisioning,additional capital buffers linked to PDs.

(h) Eighth, an additional challenge for the EMEs is that they are exposed to the volatileinternational capital flows necessitating suitable regulatory policies depending on themacro economic conditions for ensuring financial stability.

(i) Finally, for countries like India, the advantages of coming in late is that whileintroducing new products and instruments one can have the benefit of the globalexperience so that the pitfalls can be avoided while reaping the gains of innovation.

***


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India's Economic Transformation:A Snapshot

(07-09-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the Antique India Markets

Conference 2009 / Mumbai )

This growing integration of Indian economy with rest of the world was essentially anoutcome of reform measures triggered by BOP crisis in 1991.

Reforms in Real Sector

Deregulation of industry by way of eliminating licensing requirement, Overhauling of public enterprises, Enhanced role for private sector, abolition of MRTP Act, Automatic approval route for foreign investment, Elimination of quantitative import restrictions and reduction in tariff rates

De-reservation of large number of items that were earlier meant to be producedexclusively in the small scale sector. Liberalization of foreign direct investment not only in terms of scope and proportion of

foreign ownership but also with regard to procedural details.

Reforms in Services sector.

Entry of private sector and foreign direct investment that introduced competition and stateof the art technology brought a sea change in the services sector.

For instance, Mobile phones, boom in information technology (IT) and InformationTechnology and Enabled Services (ITES) sectors.

Reforms in Agricultural sector.

Measures relating to free movement of agricultural commodities, APMC Act permitting farmers to bypass the mandatory requirement of sale in regulated

markets and relaxation of restrictions under Essential Commodity Act, 1955 along withintroduction of future trading brought major change in the pricing mechanism.

National commodity futures markets discover price rather manipulation by local traders. Banks in association with professionally managed godowns extend credit to farmers

against warehouse receipts. Large consumer goods companies directly source agricultural produce from the farmers.

Economic Transformation - Reforms in Financial Sector

Money Market

Reforms were essentially aimed at providing avenues for the market players to deploy oraccess to short-term funds and a platform to the monetary authority to modulate liquidityin the system.

Deregulation of interest rates Introduction of new instruments.


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Freeing of interest rates on call and other money market instruments, Introduction of Commercial Paper and Certificate of Deposit, Exemption of inter-bank lending from reserve requirement, Introduction of screen based trading and rupee derivatives such as Interest Rate Swaps

(IRS) and Forward Rate Agreements (FRA),

Enlarging the scope of Repo market by expanding the repo-able securities and eligible participants in the repo market and introduction of tripartite repo i.e. CBLO to create pureinterbank call money market,

Government Securities Market

Till mid-eighties Government had been borrowing at sub-market rates, (captive marketcreated by statutory reserve requirement).

Concessionary financing was eliminated with introduction of market auction system and phasing out of automatic monetisation with Ways and Means Advances (WMA).

As yields became market related and Government started competing with the privatesector in the market for funds, it had the desired impact on G-Sec market as evident byrising secondary market activity and near emergence of market yield curve.

With reforms, G-Sec is no longer a captive market. Development of the market was sustained by up-gradation of technology and market

infrastructure with regard to settlement systems and trading systems and amendment oflegislative provisions.

Foreign Exchange Market

Prior to reforms, foreign exchange market was virtually absent. Introduction of market based exchange rate regime, Adoption of current account convertibility and relaxation on capital account, inter alia, in

terms of permission to run open positions, to hold investments abroad and to retainforeign exchange along with introduction of hedging tools (derivatives) led to emergenceof active and vibrant foreign exchange market.

Now exchange rate is flexible and market determined; and capital account is alsoeffectively convertible for the non-residents.

Computed from monthly NEER and REER indices, volatility in Indian market is one ofthe lowest in the world. Reform measures enhanced depth and liquidity in the marketreflected in rising turnover and moderation in bid-ask spread over the years.

Capital Market

Far reaching changes made in both the primary and secondary market segments of capital

market. Primary market witnessed a significant movement away from CCI regime imposing primary issuance at sub-market rates to free pricing and book-building system along withmandatory disclosures as prescribed by SEBI.

In the secondary market , corporatisation of exchanges, screen based trading replacingopen outcry system, introduction of options and futures replacing erstwhile Badla System,rolling settlement replacing 14-day settlement cycle, dematting of securities withdepository system created state-of-the art infrastructure comparable to best international

practice.


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Economic Transformation:

Structural reforms in Indian economy, during last two decades, have unambiguouslyaltered the economic landscape of the country.

The Indian economy has registered an impressive growth in recent times with GDPrecording an average of 7.2 per cent growth rate in the current decade from an averagegrowth of 5.7 per cent in the nineties.

The share of service sector in the national income has steadily increased withcorresponding fall in the contributions of agriculture and industrial sectors over the years.

Consequent shift in relative contribution of various sectors to national income, however, brought to fore the concerns for sustainability of the transformation process and the needfor an 'inclusive growth'.

The reform process that began economic transformation since the early nineties has been based on a broad political and intellectual consensus in India that explains as to why therehas never been any policy reversal since then.

Besides, brewing up of twin economic imbalances i.e. fiscal crisis and external paymentcrisis, the timing of reforms may have been the outcome of international and domestic

political events economic transformation is an ongoing process that needs to be pursuedwith perseverance and consensus while keeping in view their aptness to the domesticeconomy.

***


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Emerging Contours of Financial Regulation:Challenges and Dynamics

(10-06-2009 : Dr. Rakesh Mohan)

The regulatory system was clearly behind the curve in taking account of the build up ofexcessive leverage in the system and the inadequate appreciation and assessment of theemerging risks.

Hitherto unregulated institutions, markets and instruments will have to be brought underthe regulatory framework.

The regulatory framework will need to keep pace with the associated risks in a more rapidand effective manner.

A more developed macro-prudential approach will be important in this context. The overarching mandate of reforms is to make regulatory regimes more effective over

the cycle. Once conditions in the financial system have recovered, international standards for capital

and liquidity buffers will have to be enhanced, and the build-up of capital buffers and provisions in good times should be encouraged so that capital can absorb losses and bedrawn down in difficult times such as the current period.

Banks are expected to have in place effective internal policies, systems and controls toidentify, measure, monitor, manage, control and mitigate their risk concentrations in atimely manner, and under various conditions, including stressed market situations.

The supervisory authorities would have to oversee compliance of best practices forcapturing firm-wide risk concentrations arising from both on - and off-balance sheetexposures and securitization activities.

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Banking and Finance in India:Developments, Issues and Prospects

( 31-08-2009 : Dr. K. C. Chakrabarty, Deputy Governor / / At the 62nd International

Banking Summer School (IBSS) / New Delhi ) The financial imbalances that had built up inexorably during the boom, on the back of

aggressive risk-taking and leveraging, had finally started to unwind. In a cross-country perspective, when measured by the ratio of Bank assets to GDP ,

financial depth in India was among the lowest in the world . The reasons accountable for India's insulation can be listed as

(1) The nascent stage of development of the credit derivatives market;(2) Regulatory guidelines on securitization do not permit immediate profit recognition;(3) Perseverance of prudential policies which prevent institutions from excessive risk

taking and financial markets from becoming extremely volatile and turbulent; and(4) Close co-ordination between supervision of Banks and their regulation.

Future regulatory reform process in the context of emerging markets as we move aheadcan be :(1) Firstly, the issue related to 'Know Your Customer (KYC)' in Banks;(2) Secondly, whether the Banks are according 'Fair Treatment' to their Customers (FTC)(3) Thirdly, the issue of 'Risk Management' and its proper understanding and ;(4) Lastly, the Leveraging Technology for greater Financial Inclusion.

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Financial Stability : Issues and Challenges

(10-09-2009 : Dr. Duvvuri Subbarao, Governor / At the FICCI-IBA Annual Conference on 'Global Banking : Paradigm Shift' organised jointly by FICCI and IBA / Mumbai )

The financial crisis has witnessed a massive break down of trust across the entirefinancial system.

Restoration of trust in the financial system is central to the pace and shape of recovery. There was a great deal of uncertainty not only about the extent of losses and the ability of

Banks to withstand those losses, but also about the extent of risk in the system, where itlay and how it might explode.

If governments continue to incur large fiscal deficits, it will be that much more difficultfor central banks to maintain price stability.

The current crisis has shown that price stability is not sufficient to ensure financialstability; price stability is decidedly a necessary condition for financial stability.

The crisis has underscored the importance of acknowledging financial stability as anexplicit variable in the policy matrix of central Banks.

There is a misplaced concern in some quarters that the crisis may have dented India'senthusiasm for financial sector reforms.

Our three main objectives have been price stability, growth and financial stability, withthe inter se priority among the objectives shifting from time to time depending on themacroeconomic circumstances.

On financial globalization, our stance has been gradualist of making haste slowly.

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Changing Dynamics of Legal Risks in Financial Sector:

(30-10-2009 : Smt. Shyamala Gopinath, Deputy Governor / Symposium on Changing Dynamics of Legal Risks in Financial Sector / Kerala )

Some of the key legal risks faced by banking industry in the recent financial crisisrelated to bankruptcy risks, mis-selling of complex derivatives, untested risks in thesecurities market - custodial arrangements, tripartite agreements, securities lending etc.

Problems like heterogeneity of resolution arrangement can be solved by developing ahomogenized resolution framework for entities having cross-border operations butcommon resolution framework continues to be the difficulty. Sound legal agreements arealso important aspects for particularly brokers and other intermediaries in forex andsecurities markets, which essentially act as agents.

The crisis has also underlined the risks inherent in re-hypothecating assets which can bemitigated by the use of the tri-party collateral management model in which a third partysits between the prime broker and their hedge fund or other clients holding the collateralin segregated accounts. However, concentration of such repos with only few banksaggravates systemic risk.

Tricky legal issues like Ready-forward (repo) transactions were solved by RBI by makingamendment to the Reserve Bank of India Act in 2006.

Legal risks arises for the banking industry due to unreasonably long time frame involvedin legal proceedings of insolvency matters, etc. and also due to lack of priority given tosecurity interests created prior to the crystallization of State dues.

The uncertainty with respect to the validity of OTC derivatives was removed byamendment to the Reserve Bank of India Act carried out in 2006. The RBI has beeninitiating amendments in laws like the Payment and Settlement Systems Act, 2007, theBanking Regulation Act, 1949, Negotiable Instruments Act, 1881, The InformationTechnology Act, 2000 and so on to keep pace with the dynamic market place.

Banks are also, increasingly exposed to legal risk is the rising consumer grievances aboutthe services rendered by the banks. But ther

gist of speeches by rbi governors

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