none of which is prudentially desirable. in brief, the restrictions in our guidelines on upfront recognition of profit on sale of assets by the banks seek to create the right incentive framework for the banks so that the basic objective underlying the concept of securitisation does not get negated. in the aftermath of the recent sub - prime episode in some of the developed countries, caused also by wide dispersal of credit risk throughout the system through complex structured transactions, i am sure, you would appreciate the merit of adopting an appropriate incentivecompatible prudential approach towards securitisation. we need to squarely recognise that securitisation, after all, is also a credit - risk - transfer instrument and has the potential of dispersing the risks from the originating banks to those parts of the system which might not necessarily be best equipped to manage that risk. hence, rbi ’ s stand in creating the right incentive framework through prudential restrictions would seem to be an approach which has much to commend itself. migration to principles - based regulation ( pbr ) a view has been expressed in certain quarters that the indian regulatory framework should migrate to principles - based regulation from the current rules - based approach. the merits of a principles - based approach are that in a dynamic market context, where the product innovation is the order of the day, the principles - based approach to regulation provides a more enduring regulatory option since the underlying principles would not need to change with every new product whereas the detailed rules may have to be constantly modified to address the unique features of market and product developments. however, despite the stated superiority of the principles - based approach, so far very few countries have adopted this model in a big - bang or comprehensive manner. the fsa of the uk which is one of the forerunners in adoption of principles - based regulation has a rule book which has over 8000 pages. so, the pbr is not as simple to operationalise as it is to advocate. thus, in any regulatory regime, complete reliance on a principles - based approach would rarely be a feasible option since the high - level principles would need to be underpinned by the detailed rules at the operational level, to achieve the regulatory objectives. to illustrate, it might be easy to enunciate the principle that " treat your customer fairly " but ensuring it at the ground level would invariably require specific rules and prescriptions to achieve the objective underlying the principle. besides, a pbr approach also

broader portfolio level was not exhibiting any major signs of stress, the consistent high credit growth reported in the above segments warranted regulatory intervention. accordingly, certain quantitative and qualitative measures were undertaken from a macro - prudential perspective. as regulators, we would want to ensure continuous vigil to mitigate risks emerging from both within and the periphery of the financial eco - system. for example, the digital lending guidelines issued by the reserve bank envisage that regulated entity undertakes the due diligence required for lending decisions even when the loan is being sourced through a lending service provider ( lsp ). the increased reliance of banks / nbfcs to identify and onboard borrowers through fintech partners should not mean lowering of underwriting standards and improper pricing of risks. as a regulator and supervisor, we are examining the prevailing models and practices to see how best they could be leveraged for effective credit delivery, without compromising on risk management and prudential credit underwriting standards. concluding thoughts i would like to stress here that what has been shared so far is an illustration of some of the key areas of regulatory focus. at the same time, there are several other aspects which continue to be on the regulatory radar. i am sure, through a collective, consultative and collaborative approach, it would be possible to frame appropriate set of policy measures to address the current and emerging challenges. through this process, we should be able to build a stable and resilient financial system which shall meet the emerging needs of our country in an effective manner. to conclude, let me emphasize once again that even as the financial landscape evolves and transforms, the underlying principles of good governance, robust risk management, effective compliance, customer protection and responsible business conduct will be increasingly relevant. a robust culture within the organisation which delivers financial services while embracing these principles will stand the system and the institutions in good stead in the long run. 6 / 7 bis - central bankers'speeches namaskaar!! the inputs provided by pradeep kumar, peshimam khabeer ahmed and pramanshu rajput are gratefully acknowledged. 1 rbi speech : no more a shadow ( of a ) bank - available at https : / / rbi. org. in / scripts / bs _ speechesview. aspx? id = 1416 2 changing paradigms in the financial landscape - available at https : / / rbi. org. in / scripts / bs _ speechesview. aspx? id = 139