RBI’s Subbarao discusses regulating banking innovation

The governor of the Reserve Bank of India (RBI), Duvvuri Subbarao, today (August 3) delivered a speech titled Indian Payment and Settlement Systems Responsible Innovation and Regulation. During the address, the governor highlighted the central bank's role in facilitating innovation.

Speaking at a banking technology awards ceremony in Hyderabad, Subbarao said the financial crisis had renewed the debate on financial innovation and regulation. He said there was now "greater sensitivity" to the responsibilities of both innovators and regulators.

"Innovators must be responsible for the way they use their innovations. Regulators must be responsible for ensuring that financial stability and consumer interest are not compromised by the innovations. This sort of responsibility demands competence, foresight and wisdom on both sides," said the governor.

Speaking about the role the RBI had played in facilitating innovation, the governor said the RBI had tried to be a "responsible" regulator. He said innovations had been encouraged, but on the condition they "add real value and do not compromise financial stability or customer interest".

Payments systems are undergoing a modernisation, the governor said. "We need to bring in the best practices and products of the world to India, but we should adapt them to our environment and conditions. In particular, we should focus on reducing costs and improving ‘literacy' about payment products and systems."

India is shifting to become a less cash-based economy, meaning the RBI is left grappling with the monetary policy implications of this transition, the governor said.

Subbarao commended the RBI's efforts to be forward-looking in releasing a vision document on the road map for the evolution of payment and settlement systems in India for the period 2012–15. "The document reinforces the commitment of the Reserve Bank to continue to ensure that all payment and settlement systems in the country are safe, efficient, interoperable, authorised and accessible, while also furthering financial inclusion and compliance with international standards. The goal is to proactively shift from cash to electronic payment systems," he said.