What is the takeaway for small enterprises from the financial code in the making? ‘Risk-based approach to regulation,’ highlights Dr C. K. G. Nair, Economic Advisor in the Ministry of Finance. “What is recommended is risk-based approach to regulation. That means, if you are a small person who is not going to pose a risk to the system or to the consumers, you file and wait for a minimum time,” begins Nair. “If you are a new technology-based payment operator, you apply to the regulator, wait for the stipulated time, after fulfilling the required conditions which will come in the regulation. And then you start. The regulator will keep you on the radar, just as an initial stage, occasionally observing. And, as you become more and more systemically important, or more and more people get into your system, then you escalate the regulatory approach.”For starters, there is useful material in a speech by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India. “Risk based supervision (RBS) is nothing new. Several jurisdictions across the globe have adopted variations of the risk based approach in their supervisory practices with different degrees of success,” he explains. “The banking system was not really ready for the introduction of RBS when we first attempted it in 2003-04. The primitive risk management systems at banks, low levels of technology, inadequate human resource capabilities and above all, lack of patronage from the Board and top management were amongst the primary reasons that led to stalling of the project in our maiden attempt.”
A lot of positive developments have happened in the Indian banking sector since 2003-04 and improved technology has been the bedrock of these developments, observes Chakrabarty. He underlines how core banking solution, implemented across all banks, has, in turn, facilitated data availability, consistency and improved quality of MIS. Though most startup entrepreneurs may not be reading the speeches of central bankers, there are many insights to glean from such material.
For instance, in the above speech, Chakrabarty offers ‘a very practical suggestion’ for his distinguished audience of non-executive directors on the Boards of commercial banks: “Seek a detailed analysis of the income stream. Banks ought to conduct a thorough assessment of the products, services, activities or business streams that are most profitable as this is where the maximum risk must be lurking. The path and passage of risk can be truly understood only through a scrupulous income analysis.” Again, technology is what is going to make such an analysis possible.
If you are a startup in the analytics domain, or working on solutions for the financial sector, I’m sure you would get at least one lead to work on, from Chakrabarty’s suggestion, and from Nair’s emphasis on risk-based supervision.