usha thorat : financial inclusion and information technology keynote address by ms usha thorat, deputy governor of the reserve bank of india, at the “ vision 2020 – indian financial services sector ”, hosted by ndtv, mumbai, 12 september 2008. * * * it is indeed very heartening to be here at this wipro - ndtv convergence conference on “ vision 2020 – indian financial services sector ”. i thank the organizers for inviting me here today. introduction the banking system has grown enormously in the last five years keeping pace with and in some cases leading the country ’ s remarkable economic growth. simultaneously, the banking system has improved its strength, efficiency and resilience. there have also been significant improvements in the payments and settlements system and electronic payments and rtgs is now much more in use. it has played a major role in these achievements. today banks have centralised operations, more and more banks and branches are moving to cbs, network based computing, new delivery channels such as networked atms, internet banking, smart card based products, mobile access etc and are using it for customer relationship management, customer transaction pattern analysis credit profiling and risk management. at the same time, large number of households continues to be excluded from the formal banking system and as per some recent surveys their share has increased. the extent and reasons for exclusion are many and have been well documented in the rangarajan committee ( rc ) and more recently in the very comprehensive and analytical section on financial inclusion in rbi ’ s latest currency and finance ( rcf ) released a few days ago. the rcf points out that despite the broad international consensus regarding the importance of access to finance as a crucial poverty alleviation tool, it is estimated that globally over two billion people are currently excluded from access to financial services ( united nations, 2006 ). definitional issues no universally accepted definition of financial inclusion is available. financial inclusion has generally been defined in terms of exclusion from the financial system. broadly, financial exclusion is construed as the inability to access necessary financial services in an appropriate form due to problems associated with access, conditions, prices, marketing or self - exclusion. the working or operational definitions of financial exclusion generally focus on ownership or access to particular financial products and services. there is no single comprehensive measure that can be used to indicate the extent of financial inclusion across economies. specific indicators such as number of bank accounts, number of bank branches, that are generally used as measures of financial inclusion

in europe at the moment is the appropriate institutional framework for regulation. in particular, are current arrangements defined along national lines consistent with a single currency area? this issue is currently being addressed by the group of “ wise men ”, headed by alexandre lamfalussy. another important issue is the degree to which previously separate supervisory agencies should be merged. since the united states and the united kingdom provide contrasting precedents for continental europe, here too there might be a lively debate. regardless of who is in charge of supervision, how this is done is of vital importance. from this perspective, the new minimum capital adequacy standards being developed by the basel committee are of key importance. these are designed to improve the risk sensitivity of minimum capital requirements. this is true of the new standardised approach as well as of the internal - ratings based approach, for which initial proposals are under elaboration and which may include both a “ foundation ” approach and more advanced approaches for banks able to meet tighter standards. but it is particularly true of the two additional “ pillars ” of the new capital accord. these define the roles of supervisory oversight and market discipline as ways to buttress and sensitise minimum capital standards. importantly, these new proposals are also being developed with a view to building in incentives for banks to improve their own risk management practices. this is of particularly great importance since history provides us with so many examples of lenders acting imprudently, commonly when the economy is expanding strongly. what needs to be learned is that credit risk rises, rather than falls, in the cyclical upswing, even if these risks only materialise when the inevitable downturn in activity occurs. this takes me to the main challenge for market participants, namely to raise their risk - adjusted profitability on a sustainable basis. rather than trying to add to the debate on the “ profit ” side of the equation and the corresponding business decisions, i will elaborate briefly on the “ risk - adjusted ” component. in recent years, a succession of crises has raised everyone ’ s awareness of the risks involved in financial activities. in the wake of these crises, major strides have been made in the measurement and management of risk. these improvements have been evident with respect to the various forms of risk, such as market and, more recently, credit risk, and in the way risk is receiving more attention in internal capital allocation decisions. but, recognising the fact that financial crises are happening more rather than less frequently around the world,