##es and ultimate liquidity providers, whatever be the form of the financial market model. the gradual process to introducing structural reforms in the banking sector was a unique experiment undertaken with the key objective of strengthening the banking sector balance sheets and governance frameworks in a non - disruptive manner while managing the given political - economy considerations. the reforms were carefully sequenced in terms of instruments and objectives. thus, prudential norms and supervisory strengthening were introduced early in the reform cycle, followed by interest rate deregulation and gradually lowering of statutory preemptions. the more complex aspects of legal and accounting measures were ushered in subsequently when the basic tenets of the reforms were already in place. more recently, the regulatory framework has also focused on ensuring good governance through " fit and proper " owners, directors and senior managers of the banks. broadly speaking, the evolution of regulatory framework for financial sector entities has been intrinsically derived from the objective of financial stability which has always been an objective for the rbi. a unique feature of the reform of public sector banks, which dominated the indian banking sector, was the process of financial restructuring. banks were recapitalized by the government to meet prudential norms through recapitalization bonds ( no cash payment was made ). the mechanism of hiving off bad loans to a separate government asset management company was not considered appropriate in view of the moral hazard. the overhang of nonperforming loans had to be managed by the banks themselves. the subsequent divestment of equity and offer to private shareholders was undertaken through a public offer and not by sale to strategic investors. consequently, all the public sector banks, which issued shares to private shareholders, have been listed on the exchanges and are subject to the same disclosure and market discipline standards as other listed entities. the cost of recapitalization to gdp has been low relative to experience in other countries. on a cumulative basis it worked out to about one percent of the gdp and the value of the equity rajan, zingales, university of chicago. held by government is much above the amount recapitalized. all these recapitalization bonds have since been converted to marketable securities. the financial system has since expanded significantly across various segments and a number of cross - sector organisational forms combining banks, insurance companies and investment firms have emerged. in respect of certain identified conglomerates based on well defined criteria, there is an inter - regulatory mechanism for focused monitoring and supervision. however, in most

, is audit, it operations, it services outsourcing, cyber fraud, business continuity planning, customer awareness programmes and legal aspects. the guidelines, since issued by the rbi, clearly underlined that implementation of these recommendations needed to be risk based and commensurate bis central bankers ’ speeches with the nature and scope of activities engaged into by individual banks as well as the level of dependence of the business processes on technology. board level committees in the banks had been mandated to monitor the implementation of these guidelines in their respective banks. while substantial progress has been made in the past few years, i believe that banks still have to travel a lot of distance before the requirements are fully met. given the centrality of technology in the functioning of banks today, this can no longer be treated as mere matter for compliance but has to be viewed as a core business issue. supervisory concerns 9. with computerisation of various activities within a bank, as a regulator and supervisor, we have come to expect much higher capability from banks in generation of relevant management information for decision making purposes. however, one feels that there is a substantial gap between the promise and the delivery. let me highlight a few specific areas. 10. one of the primary areas of concern for the financial world is to ensure that the banking system is not abused by the unscrupulous elements for money laundering purposes. regulations on know your customer / anti - money laundering are robust across jurisdictions. however, we often find banks not having robust systems to comply with the regulations. at the time of on - boarding of the customers, banks are required to assess their customers, their business and expected turnover in their account, source of such transactions etc. in recent times, we have come across several instances of banks having allowed transactions in their customers ’ accounts without any due consideration to their declared business profiles. the accounts received multiple rtgs / neft inward transactions and several such remittances were sent out of these accounts as well. several accounts were abused to send money abroad in the form of advance import remittances. despite the disproportionate activity in such accounts, the monitoring mechanism of banks fell short of our expectations. i wonder why banks are not able to devise fool proof technology - based solutions to identify such transgressions. as you may be aware, rbi had to impose penalties on 13 banks for non - compliance with extant kyc / aml instructions including failure to categorise their customers in line with their