the basis of the feedback received from various quarters. in this context, i would only make two brief comments. first, the banking system is central to the country ’ s economy irrespective of whether banks are locally or foreign owned. some countries like australia feel that banks are so systemically important that foreign controlled banks are precluded. our stance in india is on the middle ground where foreign ownership of banks has been permitted on certain conditions. secondly, we must not forget that the cost of bank failures is not limited to rescuing banks or bailing out depositors but there can be large real economy costs. thus, a well reasoned approach of regulating ownership of banks is a necessary concomitant of a stable financial system. anti - tying measures i would now refer to an issue which is at the frontiers of regulation. banks and financial institutions are increasingly offering a broad measure of financial services and thereby endeavoring to build customer loyalty. in some countries there are anti - tying restrictions to prevent banks from forcing customers to take unwanted products to obtain needed services. these issues are interlinked to corporate ethics, a robust internal control culture and transparent disclosures. i would submit for debate that sooner or later we in india will need to consider the feasibility of antitying regulations in the financial sector. i would invite attention to an interesting presentation by ms. susan schmidt bies. ( bis review no. 42 ). further, with increasing consumer spending the data bases of the banks ’ customers are also being shared with various product sellers and the cross - selling is acquiring a new dimension of invasion of the privacy of the customer. this is an area where banks need to exercise self - regulation. concluding observation i would end here by saying that the rationale for financial regulation lies in the economic costs imposed on the society by financial market failure. the adverse consequences include threat to systemic stability, the potential for gridlocks due to adverse selection and moral hazard problems as well as undermining the substantial benefits which would otherwise accrue from correction of market imperfections, reduced transaction costs and providing people with a financial system they can trust. in a rapidly changing economic environment the financial system necessarily has to undergo change, however painful it may be.

standalone basis if they were to redefine their business strategy in favour of conservative growth which can be supported by internal accruals and by having an effective control on their risk exposures. this would perhaps be possible when they carve out a niche for themselves. self - regulation the international experience with reference to banking sector suggests that statutory regulation by the banking regulator cannot be substituted by self - regulation. it could at best supplement the banking regulation. having recognised that self - regulation has its relevance even when banking regulator is present we would encourage self - regulation. if self - regulation has to establish itself firmly the first and foremost prerequisite would be establishment of sound principles of corporate governance in the banking system as a whole. the supplementing factor, which is also enshrined in pillar 3 of basel 2, namely, transparency and disclosure should also take strong roots in the system. transparency and disclosure under pillar 3 is expected to facilitate active role for market discipline. a thought which occurs to me is whether indian markets are equipped to discipline the participants. one opinion is that the markets in india lack adequate depth and width which would qualify them as efficient markets. the above reaffirms the need for intensifying supervisory / regulatory efforts, at least in the short term, before self - regulation and market discipline stabilise in the country. in the interregnum it would be useful for the banks to take proactive measures on both, corporate governance and transparency / disclosure aspects. following the ganguly report, issues of governance in the banking system have come to the fore. increasingly exacting standards of board accountability will need to be introduced and issues relating to penal action if directors fail to properly discharge their duties need to be addressed. i raise this issue not to create panic among directors or to generate media headlines but to pose the issue of wider and effective powers for bank boards commensurate with increased accountability. ownership issues in banks in the recent period there has been considerable debate on the question of ownership of the banking system and the issue of restriction on ownership of a bank by a single individual, institution or group. in view of the importance of corporate governance in banks, it was considered necessary to lay down a comprehensive framework of policy in a transparent manner. accordingly, we have recently placed in public domain a draft paper on ‘ a comprehensive policy framework for ownership and governance in private sector banks ’. the rbi has been openly encouraging a debate on this issue and the draft would be reviewed on