banks while promoting the branchless banking model for areas not served by bank branches. hence fresh approvals to nbfcs for accepting deposits are not considered, while capital, liquidity and leverage requirements have been tightened for those already permitted to do so. 20. the second issue is that of allowing non banking financial companies especially micro finance companies to act as business correspondents of banks for branchless banking. the argument put forward is that this would enable their clients to access insured deposits, national payments system and remittance services. there have also been demands that large “ for profit ” companies having a wide network of outlets especially in rural areas could be allowed to act as business correspondents of banks as there could be significant synergies if such networks are leveraged upon. this issue is currently under examination and in doing so the possible risks such as conflicts of interest, co - mingling of funds, misrepresentation and other agency related risks would need to be weighed against possible safeguards for consumer protection. 21. non - bank non - financial entities have emerged as active players in financial inclusion in that they have helped banks in offering customised payments and remittance services to their customers based on innovative ict solutions. any role enhancement of non - banks to become principals in provision of financial services implies that these non - bank entities would have to be brought under financial regulation and this could inhibit their other activities. combining financial and non - financial business is also something the regulator may not be comfortable with as there could be conflicts of interest. our concerns have also been on the access to and the use of float funds by such non - bank entities in the process of providing such payments services. many jurisdictions have dealt with this issue by asking the service provider to maintain 100 per cent liquidity against float funds held by them and restricting the value of transactions. whether the escrowed funds / investments will be protected in the event of bankruptcy of the service provider depends on the legal provisions and there could be risks in such arrangements. in addition, there has to be clear regulatory authority over such companies. hence, our preference is to have a bank led system with non bank players as partners and service providers, so that regulatory resources are focused on banks. banks in turn take responsibility for their partners and agents as part of their risk management processes. 22. subsequent to the notification of payment and settlement systems act, 2007, the payment services have been opened up in india for non - bank service providers also. the broad

the past, they have recently come under scrutiny for their role in the financial market turbulence. however, because rating agencies rely on their reputations, they have strong incentives to improve the information content of their ratings for complex financial instruments, to ensure that all material facts are disclosed in a concise and timely manner, and to address inherent conflicts of interest in the ratings process. they have shown an ability and willingness to learn from their mistakes, and they are regularly refining their rating processes. 7 this does not mean, though, that investors can rely exclusively on the judgment of others. in the end, investors must accept responsibility for understanding and managing the credit risk in their portfolios. i'll turn now to some issues regarding financial institutions and their regulation. i'll focus on a few issues related to the models of operations in these institutions, the management of risks, and the management and regulation of liquidity. we can now see that one of the key problems with securitized u. s. subprime mortgages rested with the so - called " originate and distribute " model in which mortgage originators, many of whom did not face the same regulations as banks, entered into mortgage contracts with homeowners, and then laid off these assets as they were securitized. in principle, there is nothing wrong with having a model based on " originate and distribute, " but in practice, a number of major things went wrong, as we saw in the recent u. s. example. for example, some originators did not have sufficient incentives to conduct appropriate credit checks on clients. this model is now being closely examined by regulators in the united states and around the world, to ensure that the right incentives for originators and distributors are in place and are appropriately aligned. risk management within banks themselves is also facing scrutiny. in many cases, their riskmanagement practices did not prepare banks for the recent market turbulence, and so these market practices need to be addressed. while the basel committee on banking supervision has devoted most of its time over the past several years to completing its work on capital adequacy, it is now devoting more time and resources to the analysis of risk - management processes in banks and to the principles of liquidity management for banks. 8 let me turn now to the financial stability policies of central banks. when there is a clear market failure and a major disruption to financial stability, a central bank – depending on circumstances – may wish to relieve liquidity pressures on the