system underpins that of the economy as a whole. financial markets are different from product markets and therefore, greater liberalisation goes along with deeper supervision and higher degree of regulation. any destablisation in financial markets affects even those who are not in financial markets. on the other hand, financial markets can drive the real economy. therefore, transparency, disclosures, prudential norms and capitalisation are a must. this is essential because bank depositors have no other security except that banks are well regulated. increasing deregulation and globalisation, greater competition from within the country and cross - border dealings have exposed banks to even greater risk. diversification into non - traditional products like insurance, derivatives etc., has added to the complexity of banking business. further, internet banking, e - commerce, e - money and other information technology related innovations are adding new dimensions to risks faced by the banking sector. mergers and acquisitions as well as outsourcing of some non - core activities are undertaken by the banks with some strategic objectives they also enhance the risks in banking. considering the speed with which banking is changing, it is recognised that there is a need to enlarge the focus and thrust of risk - based supervision ( rbs ) so as to be able to improve the risk sensitivity of the supervisory approach. in view of the relevance of improved risk management systems under the changing circumstances and the larger emphasis placed on risk management systems in banks under basel ii, it is essential that rbs stabilises at an early date and serves as an important feedback to not only the managements but also the supervisors. however, taking into account the diversity in the indian banking system, stabilising the rbs as an effective supervisory mechanism will be a daunting task. consolidation and move towards universal banking we are slowly but surely moving from a regime of “ large number of small banks ” to “ small number of large banks ”. the new era is going to be one of consolidation around identified core competencies. mergers and acquisitions in the banking sector are going to be the order of the day. successful merger of hdfc bank and times bank earlier and stanchart and anz grindlays has demonstrated that the trend towards consolidation is almost an accepted fact. we are also looking for such signs in respect of a number of old private sector banks, many of which are not able to cushion their npas, expand their business and induct technology due to limited capital base. coming times may usher

be unfortunate ”, he said. rajan abandoned a high - flying career as a global economist two years ago to return to india as the chief economic adviser to the indian government. it was then facing a sharp downturn in growth and looking for a growth strategy before this year ’ s elections, which the congress party - led coalition government is expected to lose. there was speculation he was a destined for an even bigger job and that came with his appointment as governor of the reserve bank of india. he has since pursued a more focused approach to monetary policy, with three rate rises. capital economics asia economist daniel martin said in a recent report : “ overall, he has made a good start. he has taken a tougher stand on inflation and is looking to push through a broader reform agenda, both of which could lay the foundation for stronger long - term growth. ” “ but there are limits to what a central bank governor can achieve, which is why so much is riding on the make - up and performance of the next government. ” bis central bankers ’ speeches prescient forecaster rajan was chief economist of the international monetary fund from 2003 to 2006. while there, he came to the attention of global financial markets when he raised questions about the health of the global financial system at a celebration honouring former us federal reserve board chairman alan greenspan just before the global financial crisis broke out. he argued financial sector managers were encouraged to “ take risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time ”. this comment is now seen a prescient forecast of what happened after the collapse of lehman brothers. one of the other participants in the weekend g20 meeting says : “ to have a person of that pedigree in an emerging market central bank is quite a change. he ’ s the first star appointment to an emerging market central bank. no one has been appointed with this sort of profile. ” “ there ’ s a lot of interest in what he will have to say because no one knows just what he meant when he said what he said about tapering. he will be closely questioned ”, the g20 delegate said off the record. not surprisingly, rajan is a determined champion for the indian economy. he urges australian companies which fear perceived corruption and heavy - handed indian bureaucracy to learn from the experiences of western companies that have stayed the course. “ with risk comes return, and people have learnt how to make money in india