s s mundra : strong financial services sector – imperative for sustainable growth keynote address by mr s s mundra, deputy governor of the reserve bank of india, at the icai international conference “ accountancy profession : spearheading excellence ”, indore, 9 august 2015. * * * assistance provided by shri sanjeev prakash is gratefully acknowledged. good morning to you all! 1. i am pleased to be here this morning to speak to the delegates of this international conference and i thank icai for providing me this opportunity. as you all know, the theme of this morning ’ s session is “ financial services sector - agenda for sustainable growth ” and as somebody who has spent his entire professional life in the banking sector – first as a commercial banker and now as a central banker, i would speak with a particular emphasis on banking sector. introduction 2. let me begin by taking you back to south korea of the year 1997. the “ grey - haired ” amongst you would recall that in the period leading up to 1997, the korean economy as also the other “ tiger ” economies in the south east asian region had expanded by 6 % to 10 % on an annual basis. buoyed by expectations of rapid growth and expansion, the chaebols ( family - owned business conglomerates ) in korea had raised significant amounts of foreign funds for investment in building industrial capacity. however, as the economic growth slowed down, the debt problem started to accentuate and one of the chaebols, hanbo collapsed under a $ 6 billion debt load. the company had decided in 1993 to build the world ’ s fifth largest steel plant and there was cost escalation of the project from won 2, 700 bn to won 5, 700 bn while the steel demand had turned sluggish. the situation deteriorated further in july 1997 when kia, korea ’ s third largest car company asked for an emergency bank loan to avoid bankruptcy. these events prompted international credit agencies to downgrade the ratings of korean banks with heavy exposure to the chaebols and thus, began the financial meltdown in korea. 3. of course what is widely known as the “ asian financial crisis ” had begun earlier on february 5th, 1997 in thailand when a thai property developer failed to make a scheduled interest payment on its eurobond loan. the business model of financial institutions in thailand was built around issuing eurobonds denominated in us dollars to benefit from the interest rate differential between dollar denominated debt and thai debt

obligations to current and prospective borrowers is that they remain profitable and solvent. it is in this context that following regulatory actions have been launched in recent past which are a fair mix of both, prudent regulation and right incentives to support growth with proper risk management : • guidelines on “ early recognition of financial distress, prompt steps for resolution and fair recovery for lenders : framework for revitalizing distressed assets in the economy covering formation of joint lenders ’ forum ( jlf ), corrective action plan ( cap ), “ refinancing of project loans ”, “ sale of npas by banks ” to facilitate early recognition / resolution of financial distress • banks permitted to grant an extended debt repayment period to their borrowers in long - gestation projects ( “ 5 / 25 ” scheme ) • enabled banks to take steps for strategic debt conversion ( sdr ) giving them right to convert their outstanding loans into a majority equity stake if the borrower fails to meet conditions stipulated under the restructuring package • enhanced fraud monitoring framework • issuance of long term infrastructure bonds to facilitate financing of long term infra projects • revoking forbearance on restructuring certain other regulatory measures like revision of the single / group borrower exposure limits and identification of d - sibs, etc. have also been initiated. role of the auditor community in promoting sustainable growth 18. let me now turn to some messages that i would like to give the auditor community present here. first of all let me compliment you for the very critical role that you play in keeping the banking sector healthy by auditing the balance sheets of banks and that of the borrowers to whom the banks lend. i would, however, begin on a light - hearted note. i quote former aig vice chairman jacob frenkel, who, in the aftermath of the financial crisis, once bis central bankers ’ speeches quipped, “ the left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left. but they are equal to each other. so accounting - wise, we are fine. ” i am sure we don ’ t want our accounting system to be fine like this. 19. external auditors play a vital role in maintaining market confidence in audited financial statements. in the case of the banking industry, this role is particularly relevant to financial stability given banks ’ financial intermediation function within the economy as a whole. core principle 27 of the basel committee ’ s core principles for effective banking