anand sinha : it and governance in banks – some thoughts address by mr. anand sinha, deputy governor, reserve bank of india at the program for independent directors of banks organized by idrbt, hyderabad, 15 – 16 june 2012. * * * assistance provided by mr. p k chophla is gratefully acknowledged. shri sambamurthy, director, idrbt ; shri prabhakar, chairman and managing director, andhra bank, shri rao, managing director, sbh, shri siva kumar, member of faculty, idrbt, distinguished fellows of idrbt ; other members of the faculty ; and directors on the boards of banks. wish you all a very good morning. independent directors are looked upon by both the stakeholders and regulators as important contributors to the value additive and ethically positive oversight of executive management activities. the organization of this programme, by idrbt and its director, mr. sambamurthy, which focuses on it governance, information security and the role of board therein, is very timely as these factors have assumed critical importance in the sphere of corporate governance in general and bank governance in particular. while talking about this programme organized by idrbt, it would be appropriate to recall, in brief, that this institution, conceptualized in 1994 and established in 1996 by the rbi to function as a centre for research and development in banking technology, has been commendably striving to meet its objectives. it has to its credit several achievements like launch of structured financial messaging system ( sfms ) and national financial switch ( nfs ) management ; besides publication of guidance on best practices and a number of research papers on topics of contemporary relevance to the indian banking industry. now, with the reviewed and redefined goals, the institute is all set to support the banking industry, by working at the intersection of banking and technology, mainly in the areas of financial networks and applications, electronic payments and settlement systems, security technologies for the financial sector, financial information systems and business intelligence. i am sure the institute will continue to enrich the banking industry in the times to come through its good work. corporate governance coming to the theme of this programme, i would dwell, first of all, on the concept of governance. at the core of corporate governance is the principle of fiduciary duty, centered on oversight of management functioning in order to optimize stakeholder interests, within the limits of legal and regulatory compliance. this had its origin and

proposition. financial inclusion, apart from its social welfare enhancing role, should make a lot of business sense for banks in as much as they can get a large stable pool of retail deposits which will contribute very significantly to the robustness of the individual banks and to financial stability at the systemic level. additionally, there would be small value but large volume of lending and other business. what is constraining the full realization of this business potential is the comparatively large transaction costs. several technological efforts and innovations have been made for increasing the reach which has reduced the transaction costs. however, much more needs to be done to make the financial inclusion an attractive and profitable business for banks. it in banking – concerns while the increased deployment of it certainly has its own benefits in terms of enabling banks to meet the business requirements and enhance their service delivery capacity, such it usage and dependence, however, bring in some new challenges and concerns. these challenges keep on getting more complex and qualitatively different, as technology keeps on evolving rapidly. for instance, technologies like cloud computing bring in advantages and efficiencies along with new risks which have to be managed. any delay in adoption of new technologies would only let the competition pass by the laggard institutions. cloud computing is an innovative concept which enables participants to leverage on collaborative sharing of resources, which not only brings down costs but also facilitates the participants to concentrate more on their core activities, leaving the management of it resources to the service providers. this facility, by making the sophisticated applications affordable, has the potential to enable even the marginal players to make use of the technology and develop their businesses. however, this being a new technology data integrity and confidentiality seem to be a major concern at this stage. further, if too many participants rely on a single service provider, it may lead to a risk of over - concentration inasmuch as the failure of the service provider will be catastrophic. banks will have to assess the pros and cons of new technologies and put in place adequate safe guards while adopting them. as regulator and supervisor of the banking system in india, inter alia, its many other roles, rbi is concerned about the soundness of the financial system in general and banking system in particular. while it usage contributes to efficiency, it brings, along with it, certain issues such as, issues of technology selection with strategic, financial and compliance considerations ; process management to ensure cost effective and timely service delivery ; security of customer and business data at access, storage