duvvuri subbarao : responsible innovation and regulation in the financial sector keynote address by dr duvvuri subbarao, governor of the reserve bank of india, at the idrbt ( institute for development and reasearch in banking technology ) banking technology excellence awards function, hyderabad, 2 august 2013. * * * 1. once again, it is my pleasure and privilege to be here at idrbt for the annual awards for it excellence in banking. every time i come here, i am impressed by the passion and energy with which idrbt pursues its mission of improving banking technology. over the last five years, under the leadership of director sambamurthy, the institute has made impressive progress in several areas. apart from training junior and middle level officers, the institute also engages directors on the boards of banks on it strategy so as to get buy - in at the leadership level for it as a management tool. that, you would expect from an institute of this type. but idrbt performs beyond expectations. it goes beyond training in banking technology to evangelizing frontier aspects of technology that could bring efficiency gains to banks and safety to bank customers. idrbt 2. i want to recognize here some of the many achievement of idrbt. • idrbt has pioneered the development of common standards for various aspects of it in banking – the latest being standards for smart cards and micro - atms which will go a long way in scaling up financial inclusion. • idrbt has established a unique ciso forum which, among other things, is developing as a platform for sharing common concerns among banks. • idrbt has established a formidable reputation for the quality of its teaching programmes as evidenced by the placement record of its students. 3. in acknowledgement of this impressive performance along several tracks, i want to place on record the reserve bank ’ s appreciation for the achievements of idrbt and the earnest and enlightened leadership of shri sambamurthy. innovation and regulation 4. at idrbt here today, we are recognizing and celebrating financial innovation – innovations that we believe will contribute to making the financial sector more efficient and user friendly, and thereby, contribute to growth and welfare in the real sector. there cannot be a more appropriate platform for me than this one to share some perspectives on financial innovation and financial regulation. 5. from the discovery of fire to the invention of the i - pad, innovation has been the wellspring of human

change regulations to suit changing circumstances, provided larger public interest so demanded. let me illustrate this. 32. a few months ago, the reserve bank released guidelines on licensing of new banks in the private sector. in contrast to previous rounds of bank licensing, in this round, we have decided to make corporates eligible for bank licences. we did so after extensive debate, consultation and deliberation. 33. the main arguments against admitting corporates into banking were the following. first, banks are entrusted with large public deposits ; corporates would misuse this large and cheap money for private gain by connected lending to their own units or to customers and suppliers. second, the ownership structure of large corporates will open opportunities for regulatory arbitrage in case the promoter of the bank at the apex level is an unregulated entity. that could potentially lead to gaps in risk assessment and heighten the risk of contagion from the corporate to the bank and from there to the wider financial system. the third argument against corporates has been that banking in the hands of corporates would lead to concentration of economic power and political influence. fourth, people asked why we need to take unnecessary risk by opening banking to corporates since there are enough potentially strong applicants outside of the corporate sector. 34. indeed the criticism has been much more varied and nuanced than the way i have put it. my idea was just to give you the broad picture. at several stages over the last three years, we have responded to this criticism. let me briefly summarize that. 35. the main reason we have allowed corporates is to leverage on their proven entrepreneurial talent and management expertise. indian corporates have been innovative in penetrating into the hinterland, and the expectation is that the same spirit of enterprise will lead to innovation of new business models for financial inclusion. large corporates will also bring vast pools of capital that will go into strengthening financial intermediation and making our banking sector more competitive. moreover, corporates have been operating in other regulated sectors such as telecom, airports, power etc. they have also been allowed into other segments of regulated financial activities such as mutual funds, asset management, insurance etc. 36. in short, over time, the balance of arguments for and against corporates in the banking sector has changed. it is in response to this changed situation that the reserve bank took a pragmatic view and determined that allowing corporates into the banking sector would be net positive. 37