provide services to small businesses, increasing the extent to which they compete with community banks. these changes have posed significant challenges for community banks. even so, many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. their business model is based on an important economic explanation of the role of financial intermediaries – to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers. a small, but growing, body of research suggests that the financial services provided by large banks are less - than - perfect substitutes for those provided by community banks. 4 consistent with this view, one study finds that the increase in competition from large, geographically diversified banking organizations has not affected the profitability of community banks in urban areas. there is some evidence of a profitability effect in rural areas, but it is actually more likely to be positive than negative. 5 thus, for most community bankers, the increased presence in their local markets of large, geographically diversified banking organizations appears not to adversely affect profitability. this circumstance may be due to the fact that a see, for example, robert adams, kenneth brevoort, and elizabeth k. kiser, ( 2007 ). " who competes with whom? the case of depository institutions, " journal of industrial economics 55, pp. 141 - 67 ; andrew cohen and michael j. mazzeo, ( 2007 ). " market structure and competition among retail depository institutions, " review of economics and statistics 89, pp. 60 - 74 ; and timothy hannan and robin prager, ( 2004 ). " the competitive implications of multimarket bank branching, " journal of banking and finance 28, pp. 1889 - 1911. see timothy hannan and robin a. prager, ( 2009 ). " the profitability of small single - market banks in an era of multi - market banking, " journal of banking and finance 33, pp. 263 - 71. branch manager at a large depository institution typically does not have the same local connections and relationships as a community bank president. furthermore, although survey data indicate that small businesses have increased their reliance on large banks and non - bank financial service providers in recent years, the data show that these same firms have not reduced the average number of financial services

are guided by prudence and sound business sense. at the same time, it wields the sword of transparency and accountability by holding decision makers accountable for their actions and fostering a culture of ethical leadership. to build a strong bedrock of governance, following conditions are critical : i. a diverse and independent board with effective oversight. ii. a robust risk management framework for identifying, assessing, and mitigating risks inherent in the portfolio of distressed assets. iii. transparency regarding disclosure of information about the operations and decision - making processes and accounting practices. iv. effective safeguards and robust policies to identify, disclose, and manage conflicts of interest in a fair and transparent manner. v. 3 / 5 bis - central bankers'speeches v. a comprehensive code of conduct that outlines ethical principles, professional integrity, and accountability. sound governance in arcs, therefore, requires a multifaceted approach that encompasses all the above elements. the onus in this regard lies largely with the boards of the arcs and the top functionaries who will have to develop a strong and robust institutional culture based on these principles. without robust governance mechanisms, it would be a challenging task for arcs to instil confidence in their operations and decision - making processes. arcs also need to be conscious of their conduct vis - a - vis the distressed borrowers. even a single incident of misconduct can potentially snowball into a controversy which the sector should guard against. while we acknowledge the rights of the arcs to recover overdue loans, they or their recovery agents should not resort to harassment of borrowers. a comprehensive fair practice code ( fpc ) for arcs has been put in place which requires arcs to follow transparent and non - discriminatory practices. this becomes that much more critical at present juncture when the share of retail loans in the financial assets acquired by the arcs has increased ( from 9 %, as of march 31, 2020 to 16 % as of march 31, 2023 ). way forward as you are aware, the regulatory framework of arcs was comprehensively reviewed by a committee constituted by the reserve bank ( chair : shri sudarshan sen ). based on these recommendations we have issued a set of revised instructions in october 2022 and they have also been subsequently incorporated in the comprehensive master directions on arcs issued on april 24, 2024. these instructions are aimed at having a robust governance system in place. with a view to enable this and in order to enhance board oversight, it has been stipulated that arcs need to appoint