r gandhi : indian banking at crossroads – challenge of risk management from globalisation to financial inclusion valedictory address by mr r gandhi, deputy governor of the reserve bank of india, on the occasion of seminar on banking, organized by the indian merchant ’ s chamber, mumbai, 8 may 2014. * * * assistance provided by ms. anupam sonal in preparing this speech is gratefully acknowledged. 1. shri shailesh vaidya, chairman, indian merchants ’ chamber ( imc ), shri chandan bhattacharya, chairman, finance and banking committee, imc and delegates to this imc national seminar, a very warm good evening! it is an honour for me to be here today to deliver the valedictory address of this national seminar organised by imc. the seminar provides an opportunity to consider the developments in the banking risk management, assess the recent experience in this space and work on the way ahead. why risk management assumes greater significance in banks 2. most business activities and operations are driven by considerations of returns or profitability. however the search for returns exposes the businesses to risks. also risks escalate and multiply with returns sought – banks are no different ; only the element of riskiness in the banks ’ business and operations is higher as they not only carry out their operations with borrowed money and with high leverage but also attempt to provide a vast range of financial services. 3. banks perform multifarious functions. however financial intermediation and maturity transformation are by far the most significant activities performed by banks. banks essentially have a liquid liability profile, as against an illiquid asset profile, which makes them vulnerable to runs and in this process alone, they generate or are exposed to different types of risks. credit, market and operational risks are the three primary risks that have a substantial bearing on the performance of banks. there are a number of other types of risks, emanating both from within and without that the banks are exposed to in their day to day functioning. 4. further, banks are intricately linked to the various segments in the financial sector and the economy. problems emanating from the banking sector can cause wide spread destabilization to the segments to which it is, directly or indirectly linked. 5. as the banks perform this role of intermediation in fiduciary capacity, ensuring a balance between the risks and returns assumes significance and the effort towards achieving this balance can be referred to as risk management

removal of the incompetent management is contemplated ". the advisory group on securities market regulation, may 2001 ( chairman mr. deepak parekh ) also referred to the diffusion of regulatory responsibilities when it stated " the regulatory responsibility of the securities market is vested in the sebi, the rbi and two government departments – department of company affairs and department of economic affairs. investigative agencies such as economic offences wing of the government and consumer grievance redressal forums also play a role ". it is interesting to note the suggestion made by the deepak parekh group for greater coordination in regulation through the high level group on capital markets ( hlgcm ) :. " there may be merit in formalizing the hlgcm by giving it a legal status. besides, the hlgcm needs to meet more frequently and its functioning needs to be made more transparent. also, a system needs to be devised to allow designated functionaries ( not necessarily only at the top level ) to share specified market information on a routine and automatic basis ". this recommendation relating to giving a legal status to the hlgcm is in consonance to what came to be described as the reddy formula for handling the regulatory gaps and overlaps. there have been several suggestions for improvements in regulatory mechanisms through technical papers and reports of working groups in rbi. for example, the technical paper on regulation of debt markets prepared by rbi and submitted to ministry of finance in 1999 considered issues of concern, an overview of money and securities markets, existing regulatory framework, review of international practices and made several recommendations. as a follow up of one of the recommendations, the government of india issued notification under section 29 a of the securities contract regulations act formally demarcating clearly the regulatory jurisdiction over money, and government securities markets. the proposed clearing corporation is yet another follow up of these recommendations. recognising the criticality of formal coordination and information exchange mechanisms between rbi and other agencies, an internal study group was set up in 1998 to suggest an institutional framework for inter - agency coordination as part of the exercise of bridging gaps in compliance with basle core principles. the group had recommended that formal arrangement for sharing of information to be put in place between domestic regulators and as a first step, a group drawn from rbi, sebi, nhb, irda, nabard and dca could identify areas of concerns. it also recommended that a shared data base to serve the information needs between regulators and