k c chakrabarty : beyond core banking solutions ( cbs ) – fast forward to banking 2. 0! address by dr k c chakrabarty, deputy governor of the reserve bank of india, at the executive roundtable organised by the institute for development and research in banking technology ( idrbt ) in collaboration with union bank of india, mumbai, 18 february 2011. * * * assistance provided by smt nikhila koduri in preparation of this address is gratefully acknowledged. 1. shri m v nair, chairman & managing director, union bank of india, shri b sambamurthy, director, idrbt, shri s s mundra, executive director, union bank of india, shri m g sanghvi, executive director, bank of maharashtra, senior bankers, other distinguished guest, ladies and gentlemen. it is a pleasure to be in your midst today at this executive roundtable organised by idrbt in association with union bank of india on the theme “ beyond core banking ”. as you may be aware, this is a part of a series of roundtable organised by idrbt in collaboration with banks on the subject and i am happy to have been associated with some of them. idrbt has been doing a commendable job in enlarging the role banking technology and research and i do not recall of any other comparable institution in the world. under mr sambamurthy ’ s leadership, in keeping with its mandate, it is moving away from transactional areas into more strategic areas and research. 2. the next information revolution is well under way. peter drucker in the new information revolution has said and i quote “ the next information revolution is forcing us to redefine what business enterprise actually is – the creation of value and wealth. ” but it is not happening where information scientists, information executives, and the information industry in general are looking for. it is not a revolution in technology, machinery, techniques, software, or speed. it is a revolution in concepts - internet, web etc. it is age of the “ prosumer ” : producer and consumer of information. this prosumer is you – a web user who creates and uses content and information on the web. so far, for 50 years, the information revolution has centered on data – their collection, storage, transmission, analysis, and presentation. it has centered on the “ t ” in it. the next information revolution asks two pertinent questions : what

interplay between dominant shareholder ( s ), minority shareholders and management. the ability of steer through this distinguishes an effective board from an ordinary one. ‘ independence ’ of independent directors 19. independent directors are necessary to counterbalance interests that are well represented 4 / 6 bis central bankers'speeches on the board with those who do not have representation or are inadequately represented on the board. independent directors help to bring in clarity regarding responsibilities and also enhance accountability of the management to the stakeholders. the most effective boards are the ones that can overcome the challenges of the ‘ principal - agent ’ relationship and resolve the information asymmetry conundrum. the degree of this asymmetry is bound to increase in large and complex entities. to resolve this challenge, the independent directors need to recognise that they are the ones who must overcome the information asymmetry. remember, it is the management which functions under the superintendence, control, and direction of the board. why else would a board need to exist? of course, for this to happen, the independent directors need to be truly independent in form and in substance. compensation practices 20. remuneration policy forms an integral component of internal governance structure of the bank which enables the board to reward good performance and acceptable risk - taking behaviour. it also gives a tangible tool in the hands of the board ( or by delegation to nomination and remuneration committee of the board ) to align risk taking behaviour of the key risk takers with the approved risk appetite and strategic direction. within this perimeter, it is the entrepreneurial spirit of various risk takers which drives the entity towards achieving its objectives. 21. while existing guidelines for private sector banks in india require that compensation of ceos, whole time directors, control function staff and material risk takers ( mrts ) shall be adjusted for all types of risks and is sensitive to the time horizon of the risks, we often see misalignment in the performance of the entity and compensation proposals recommended to the nrc / board. let me emphasize - the last thing rbi would like to do is to decide remuneration of individual bank executives which is essentially a board / nrc function. but there are at times situations where the internal and external equity of such compensation is not adequately justified in the proposal. we need to remember that perverse incentives may lead to reckless behaviour or higher risk taking which may manifest itself over a period. the compensation practices, where employees were often rewarded for increasing short - term profit