in facilitating innovation. 12. having set that context, i now want to address three specific sub - topics in the area of payment and settlement systems : i. rbi ’ s role in modernizing payment systems ii. rbi ’ s approach to responsible regulation iii. rbi ’ s role as facilitator of innovation rbis role in modernising payment systems 13. so, let me turn to the first sub - topic – the role played by the reserve bank in the modernization of the payment and settlement infrastructure of the country. paper based clearing 14. the reserve bank kickstarted the modernisation of the paper based system in the mid - 80s with the introduction of micr technology in the four metros. today micr technology is used at 66 centres across the country. besides, more than 1100 smaller centres have been brought under a uniform computerised clearing package – the “ express cheque clearing system ” – to enable the required level of interoperability across all the clearing houses. leveraging on the core - banking infrastructure of banks, we introduced “ speed clearing ” in 2008 to facilitate collection of outstation cheques on a local basis. 15. another major initiative has been the cheque truncation system ( cts ) which was operationalised in the national capital region of delhi in 2008. cts, as many of you know, is an image based cheque clearing system obviating the need for physical movement of cheques. a further technological improvement of the regular cts environment is the grid bis central bankers ’ speeches based cts. the grid based cts encompasses multiple clearing locations spread across several states facilitating the processing and clearing of cheques of all the banks under that particular grid. the national payments corporation of india ( npci ), the umbrella retail payments organization set up by banks, has since operationalized a grid based cts in chennai in 2011. electronic payment systems 16. even as it was modernizing paper based transactions, the reserve bank was also simultaneously working on retail electronic payment systems such as electronic clearing service ( ecs ) for bulk payment transactions ( credit as well as debit ) and an electronic funds transfer ( eft ) system. the localised ecs has today metamorphosed into an ecs suite of products : ( i ) a localised ecs catering to the bank branches of a local clearing house ; ( ii ) a regional ecs covering all the bank branches of a state or several states as in the north - east ; and

duvvuri subbarao : indian payment and settlement systems responsible innovation and regulation keynote address by dr duvvuri subbarao, governor of the reserve bank of india, at the idrbt ( institute for development and research in banking technology ) banking technology awards function, hyderabad, 3 august 2012. * * * 1. first of all, my thanks to the management of idrbt for inviting me to this eighth edition of the idrbt banking technology awards function. financial innovation in the context of the crisis 2. we are gathered here today to recognise and celebrate financial innovation. if we take a long sweep of history, there is no doubt that innovation has contributed to enhancing the quantum, quality and reach of financial intermediation. in recent years though, financial innovation has become a contentious issue. unbridled financial innovation and the failure of regulators to check that are also being cited as among the culprits for the global financial crisis. 3. quite understandably, the crisis has triggered a number of questions about financial innovation. is all financial innovation for the good? are there good and bad innovations? what determines if an innovation is good or bad – the innovation itself or the way it is used? who is to determine if an innovation is good or bad? do regulators have the wisdom and competence to regulate without stifling value adding innovation? 4. these questions are subject matter of a vigorous debate among financial markets and financial sector regulators. even as this is largely work in progress, the objective of all this effort is clear – to make both innovators and regulators more responsible. 5. is this talk about responsibility just a homily? i believe it is more than that. let me explain. innovations, we know, are not driven by altruism ; they are motivated by private profit. if there is no private profit, there will be no innovation. in theory, as adam smith had propounded over two centuries ago, this is no bad thing. individual pursuit of profit, driven by selfishness, can indeed lead to collectively optimal outcomes. the important condition for this to happen though is that markets must be competitive and efficient. but markets fail, and financial markets fail more notoriously than other markets for a variety of reasons – information asymmetry, moral hazard, adverse selection, externalities etc. 6. possibly the only way to mitigate the risks of market failure in respect of financial innovation is regulation. and herein comes responsibility.