shop floor / products / services inflation alone, as a key variable, in monetary policy response. for what happened was unprecedented in that with monetary policy focused only on traditional cpi, interest rates were kept low in spite of exploding prices of assets like real estate / property, credit assets, equity and commodities. and this was all made possible because of the huge current account surpluses in china and other emes, and huge private capital inflows into emes in excess of their current account deficit, getting recycled back as official capital flows into government bonds of reserve currency countries, especially the usa, resulting in compression of long term yields which, in turn, translated into lower long term interest rates even for the riskier asset classes mentioned above. this chasing of yield, due to global savings glut, in turn, led to unprecedented underpricing of risk as reflected in the all - time - low risk premia with junk bond spreads becoming indistinguishable from investment grade debt! such a low interest rate environment coupled with luxuriant supply of liquidity, created enabling environment for excessive leverage and risk taking so much so that american household debt exceeded the country's gdp! this, in turn, led to a sort of the so called “ ponzi finance culture ” where, with personal savings rate at close to zero, consumption spending binge was driven through withdrawal of home equity made possible by omni - present home equity loans rather than through incomes! thus, the entire debt binge was spent in consumption and not investment, leading to a veritable partial deindustrialization of america, as it were, with the possible exception of the services sector. all this while, the us growth story stayed non inflationary due primarily to cheap imports from china, asia and emes. in a refreshing and instructive contrast, in an almost identical macroeconomic environment in the usa in the 1980s, the volcker fed resolutely tightened monetary policy to counter the potentially inflationary impact of unsustainably high fiscal and current account deficits of the usa as a result of which, and also the fact that, unlike this time, there was no savings glut, us interest rates rose almost to 18 - 20 %! this fed action saved the day in as much as the risk premia became very high ex ante avoiding, unlike in the recent crisis, underpricing of risk and the financial meltdown although it exacted its toll in the

of business or exit existing ones, all without any need for prior approval from the government. all this meant that greater autonomy to the boards of public sector banks came with bigger responsibility. lastly, a series of structural reforms raised the profile and importance of corporate governance in banks. the “ structural ” reform measures included mandating a higher proportion of independent directors on the boards ; inducting board members with diverse sets of skills and expertise ; and setting up of board committees for key functions like risk management, compensation, investor grievances redressal and nomination of directors. structural reforms were furthered by the implementation of the the ganguly committee recommendations relating to the role and responsibilities of the boards of directors, training facilities for directors, and most importantly, application of “ fit and proper ” norms for directors. some important issues relating to corporate governance of banks in india let me move on to discussing a few issues in corporate governance of banks which should engage our collective attention. i will do so under five headings. bank ownership the first issue concerns ownership. there is typically a divergence between the interests of shareholders and of depositors. shareholders want profits to be maximized by taking on greater risk ; depositors have an overriding preference for the safety of their deposits and hence for lower risk. at the same time, depositors have little say in the governance of banks whereas the shareholders ’ say is very pronounced. within the shareholder group, the extent of control exercised by promoter shareholders too is an important determinant of the effectiveness of corporate governance. as some recent instances demonstrated, such excessive influence of promoters can turn the board into a mouthpiece of the promoter to the detriment of the interests of all other stakeholders. another way to look at the issue of ownership is in terms of public vs. private ownership. if banks are publicly owned, issues of conflict of interest between shareholders and depositors get mitigated. public ownership of banks would also inspire confidence in the financial system. on the other hand, an important question is whether effective and autonomous corporate governance is compatible with public ownership of banks. the question arises bis central bankers ’ speeches because publicly owned banks render accountability to the government and to the democratic institutions. the government judges them on criteria quite different from those used by the market. how can we resolve this dilemma? is it possible to stay with public ownership but still give near total autonomy to the boards? is it, in particular, possible to cede the power to appoint the ceo to