Inaugural Address at the 26th Biennial Conference of The Bank of Maharashtra Officers' Association, January 26th 2013 From the paradox of sustainable growth, structure of global growth the talk examines the design of fragile financial systems. It makes a plea for the design of responsible banking systems. Global pressures for growth have concentrated global ownership of growth in a few nodes. Failure of one node quickly brings the global economy crashing down. The UID with its concentrating and connecting the financial network across the Indian economy promises high likelihood of destroying the resilience of the Indian financial system. Responsible banking systems will focus on the borrower and lender relationships and ways to sustain it rather than ways in which this relationship will vanish and destroy banking.

1. The role of banks in building resilient economies Page 1
The
role
of
banks
in
building
resilient
economies
Inaugural
Address
at
the
26th
Biennial
Conference
of
The
Bank
of
Maharashtra
Officers'
Association,
January
26th
2013
Anupam
Saraph1,
Ph.D.,
The
paradox
of
sustainable
growth
I
am
not
a
banker.
I
was
therefore
more
than
a
little
surprised
and
skeptical
about
speaking
to
bankers.
Then
I
remembered
that
way
back
in
the
nineties
my
colleague
Prof.
Malcolm
Slesser
and
I
had
made
a
model
of
the
Scottish
Economy
for
the
Royal
Bank
of
Scotland.
Using
our
model
we
had
explored
many
scenarios
including
one
where
credit
would
be
advanced
liberally
to
the
population.
Our
model
had
suggested
that
a
liberal
credit
policy
would
be
deeply
unsustainable
by
2010-­‐2012.
If
Prof.
Slesser
were
alive
today
he
would
have
felt
vindicated!
In
the
mid
eighties
I
worked
for
the
Systems
Research
Institute
where
we
coordinated
a
network
of
over
1000
policy-­‐makers,
researchers
and
businesses
to
spread
the
idea
of
sustainable
development.
I
suppose
we
were
way
ahead
of
the
times.
Even
the
Brundtland's
World
Commission
on
Economic
Development
came
up
with
the
declaration
of
sustainability
in
1987!
Among
the
most
influential
ideas
since
those
years
was
the
work
of
the
MIT
team
lead
by
Jay
Forrester,
Dennis
and
Donella
Meadows
for
the
Club
of
Rome.
The
team's
research
suggested,
for
the
first
time,
that
there
was
a
limit
to
growth.
Sustainable
growth
was
an
oxymoron.
While
the
notion
has
since
become
axiomatic,
many
still
continue
to
swear
by
growth.
Year
on
year
every
business
and
every
financier
wants
more
and
more
growth.
The
structure
of
global
growth
A
world
growing
under
the
pressure
of
growth
has
driven
itself
to
a
concentration
of
wealth
and
power.
Research
by
scientists
from
the
Swiss
Federal
Research
Institute
found
that
from
the
43,060
trans-­‐national
companies
(TNC's)
sharing
ownerships
that
they
pulled
out
from
a
2007
Orbis
database
containing
37
million
companies,
1318
connected
to
an
average
of
20
other
companies.
These
1318
companies
represented
20
percent
of
the
global
operating
revenues.
Collectively
they
owned
most
blue-­‐chip
and
manufacturing
companies
representing
a
further
60
percent
of
global
revenues.
When
the
team
further
untangled
the
web
of
ownership,
they
found
147
more
tightly
knit
companies,
mainly
banks
and
other
financial
institutions,
whose
ownership
was
held
within
other
members
of
this
"super-­‐entity"
and
together
controlled
about
40
percent
of
the
total
wealth
in
the
network.
The
failure
of
one
node
within
these
147
causes
similar
failures
in
linked
nodes
to
propagate
causing
large-­‐scale
collective
failures.
It
is
no
secret
that
the
global
banking
network's
activities
are
directly
responsible
for
the
majority
of
the
financial
woes
that
have
befallen
the
global
community,
especially
since
the
2008
events
that
have
put
the
financial
system
into
meltdown
mode.
In
the
UK,
whose
GDP
is
2,470
billion
USD
and
annual
spending
1,019
billion
USD,
more
than
1,102
billion
USD
was
spent
on
Bank
bailouts.
In
the
US
over
700
billion
USD
was
spent
on
bank
bailouts.
When
the
global
GDP
stands
at
63
trillion
USD
off-­‐exchange
trading
of
financial
derivatives
stood
at
601
trillion
USD
in
2010.
At
the
same
time
the
total
volume
of
foreign
currency
1
Anupam Saraph is a Future Designer. He works with works with businesses and governments to
build capacity and design better systems.

2. The role of banks in building resilient economies Page 2
transactions
stood
at
over
955
trillion
USD.
This
clearly
highlights
the
fragile
and
unsustainable
growth
that
threatens
to
sink
the
world
to
deep
crisis.
The
lessons
are
clear:
we
create
a
highly
fragile
system
if
we
connect
hundreds
of
unconnected
networks
to
allow
a
few
nodes
to
control
the
entire
network;
second
and
third
order
connections
result
in
auditors
nightmare;
frauds
get
amplified
not
contained
in
such
structures.
The
design
of
fragile
financial
systems
Closer
home
we
have
bigger
reasons
to
worry.
Ironically
it
is
the
Aadhar
initiative
that
will
connect
multiple
ID's
that
were
independent
of
each
other
and
facilitate
their
control
by
a
single
ID.
Further
in
this
web
of
intrigue
the
UID
is
generated
by
many
registrars,
sub-­‐
registrars
and
enrollment
agencies
with
no
accountability
or
legal
liability
resulting
in
an
auditors
nightmare.
Like
the
network
of
ownership
of
companies,
this
network
too
can
propagate
and
amplify
fraud
in
the
system.
There
is
no
audit
of
the
enrollment
of
persons
by
the
enrollment
agencies
beyond
a
"de-­‐duplication",
or
check
for
existence
of
the
same
individual
in
the
database
so
far.
The
de-­‐duplication
is
undertaken
by
three
non-­‐Indian
companies
on
the
basis
of
"biometric"match.
Biometric
is
not
a
foolproof
system
and
the
creation
of
fake
ID's
through
fraudulent
biometric
cannot
be
ruled
out.
Experts
estimate
that
there
may
be
over
30
million
fake
IDs
already.
Enrollment
agencies
are
private
parties
paid
per
record
they
add.
The
registrars
and
sub-­‐registrars
for
UID
are
the
very
governments
and
departments
whose
databases
of
beneficiaries
the
UIDAI
has
questioned.
Further
there
is
no
audit
of
the
records
generated
by
the
enrollment
agencies.
This
raises
many
questions
about
the
registration
process.
Who
certifies
each
UID:
the
enrollment
agency,
the
de-­‐duplication
company
or
the
UIDAI?
Who
certifies
the
KYC:
the
enrollment
agency,
sub-­‐registrar,
registrar,
UIDAI?
Who
audits
the
UID,
UIDA
enrollment
agencies
and
registrars?
Who
own
the
UID?
The
enrollment
agencies,
sub-­‐registrars
and
registrars
are
free
to
add
their
own
fields
in
the
form
and
deal
with
the
information
as
they
like.
Who
is
responsible
for
the
ownership,
privacy
and
security
of
this
information?
Who
has
the
legal
liability
for
correctness
and
protection
of
the
information?
Who
will
be
held
responsible
if
there
are
frauds,
thefts
or
other
crimes
based
on
the
UID?
According
to
the
UIDAI
an
instant
bank
account
can
be
activated
at
any
"manned
customer
service
point"
where
UIDAI
will
provide
instant
e-­‐KYC.
This
opens
up
possibilities
of
bulk
accounts
being
generated
through
UIDs
provided
by
KYC
service
agencies.
This
raises
several
questions:
Who
certifies
each
bank
AC:
the
“manned
service
point”,
the
bank,
the
KYC
service
provider,
UIDAI?
Who
audits
each
bank
AC?
Who
owns
the
bank
AC:
the
UID
number
or
a
real
person?
Who
has
the
legal
liability?
Who
is
responsible
for
the
fraudulent
accounts,
theft
through
such
accounts
or
any
other
crimes?
According
to
the
UIDAI
any
resident
can
automatically
receive
or
transfer
money
from
UID
to
UID.
If
there
is
no
bank
account
and
instant
account
can
be
created
using
the
UID.
The
UID
can
in
effect
replace
an
account
number
for
money
transfers.
This
raises
several
serious
questions:
Who
certifies
each
transfer:
the
UIDAI
or
the
bank?
Who
audits
each
transaction
for
being
to
a
real
person:
the
UIDAI
the
bank
or
the
banks
auditors?
Who
owns
the
money
in
the
account:
the
UID
number
or
a
real
individual?
Who
has
the
legal
liability:
the
bank
or
the
UIDAI?
Who
will
be
charged
for
frauds,
money
laundering,
theft
of
subsidies
and
other
money
using
shell
accounts
opened
instantaneously
with
UIDs?

3. The role of banks in building resilient economies Page 3
The
entire
processes
of
UIDAI
absurdly
do
not
have
UIDAI
certifying
anything.
The
registration
is
outsourced,
the
authentication
is
outsourced
and
even
the
storage
and
management
is
outsourced.
They
only
provide
a
number.
There
is
no
log
of
any
registration
or
authentication
undertaken
by
any
of
the
UIDAI's
"agents".
UIDAI's
agents
have
no
legal
liability
and
the
processes
and
contracts
do
not
fix
responsibility
for
frauds,
fake
ids
or
identity
theft.
The
UIDAI
only
issues
privacy
and
security
guidelines
to
its
agents.
There
is
no
audit,
certification
or
legal
responsibility
on
the
agents
to
deliver
privacy
or
security.
The
UID
is
based
on
the
assumption
that
each
UID
is
unique.
Private
parties
"verification"
and
“de-­‐duplication”
results
in
the
issue
of
a
UID.
Payments
to
these
private
parties
are
based
on
volume,
not
correctness.
In
fact
there
is
no
process
to
ensure
correctness.
This
process
cannot
guarantee
a
unique
UID.
There
is
little
reason
to
believe
that
residents
cannot
receive
duplicate
or
fake
UIDs.
Therefore
the
assumption
that
each
UID
corresponds
to
only
one
real
individual
fails.
UIDs
may
also
correspond
to
non-­‐existent
individuals.
There
is
no
process
for
any
verification
in
cash
transfers:
money
can
be
transferred
to
or
from
duplicate
or
fake
accounts
generated
by
UID.
There
will
be
no
reason
for
any
complaints
in
the
matter,
as
no
one
may
know
of
such
transfers
at
all.
These
accounts
can
become
unnoticeable
channels
for
routing
subsidies.
Today
there
are
only
18,950
rural
branches
to
service
593,731
villages.
This
means
there
are
31
villages
to
each
branch.
The
bank
infrastructure
cannot
cope
with
accounts
opened
without
verification
on
such
a
large
scale.
Even
in
urban
areas
there
are
over
7,500
persons
per
urban
branch
if
they
were
evenly
distributed.
If
the
9
trillion
(9
lakh
crore)
rupees
of
subsidies
were
passed
through
UID
accounts
every
year
it
would
be
impossible
to
track
and
prevent
theft.
Given
the
track
record
of
cooperative
and
private
banks
on
non-­‐performing
assets
this
is
a
huge
leap
of
faith
that
money
of
this
magnitude
could
pass
through
UID
channels.
Designing
responsible
banking
systems
Banks
do
not
stand
in
isolation.
They
are
part
of
a
system.
A
banking
system
has
borrowers
and
lenders.
It
is
the
relationship
between
these
key
actors
that
drives
the
banking
system.
If
this
relationship
gets
unfair
in
any
way
the
banking
system,
not
individual
banks,
becomes
unviable.
When
third
parties
like
regulators,
governments
or
foreign
banks
enter
the
system
they
alter
the
relationship
between
the
borrower
and
the
lender.
If
the
banking
system
has
to
endure
it
will
have
to
sustain
the
trust
between
the
constituents,
not
destroy
it.
The
way
ahead
is
clear:
schemes
like
the
Aadhar
card
that
make
the
stable
system
fragile
need
to
be
scrapped
before
they
bring
the
economy
crashing.
Accounts
must
be
opened
by
real
persons,
not
numbers.
Only
audit-­‐able,
transparent
systems
will
build
trust.
Banks
committed
to
local
self-­‐reliant
economies
will
endure,
not
ones
that
build
growth
on
distant
borrowing
or
lending.
Banks
will
have
to
pursue
missions
that
build
security
for
the
banking
systems
not
only
for
one
actor
–
banks
-­‐
within
the
system.