RBI Issues Report On Banking In India
The RBI, India’s Central Bank issued a report last Wednesday suggesting the country, with its strong drivers for economic growth, may escape the works of the global credit crisis. The report titled “Trend and Progress of Banking in India, 2007-08” suggests that once the global situation stabilises, India will return to the high growth rates it has been accustomed to over the last decade.
The present challenge faced by banks is to meet credit demand whilst maintaining credit quality. The RBI in the report said that banks must monitor their credit portfolio’s carefully, taking corrective action to prevent asset-liability mismatches, whilst bearing in mind business cycles and monetary policy measures.
The RBI said that banks should ensure business decisions are guided by the long-term perspective of macroeconomic developments and are not unduly influenced by the current stream of exceptional events.
The central bank also urged banks to maintain the delivery of credit to the sectors of the economy that are productive. Though the impact on India of the credit crisis has been limited, its effects have been felt on the credit equity and foreign exchange markets nevertheless.
The report said that Indian financial markets are safe and Indian depositors enjoy a high degree of protection. About 93 per cent of deposit accounts and 61 per cent of total assessable deposits were fully protected at the end of March 2008.
Talking in particular about the Indian banking system, the report said that risk management in India has been made more granular and prudential norms for off-balance sheet exposure of banks have been prescribed. In order to further strengthen capital requirements, the credit conversion factors, risk weights and provisioning requirements for specific off balance sheet items, including derivatives, have been reviewed.
In India, complex structured products, such as, synthetic securitization, have not been permitted so far. Introduction of such products, when found appropriate, would be guided by the risk management capabilities of the system. Exposures of banks to synthetic security derivatives are the main cause of the global financial crisis
The report said that the major problems which financial institutions have faced internationally are illiquid assets, capital shortages and collapse of counter-party trust. In India, however, the situation is different. The central bank has been vigilant about the lessons that have emerged from the crisis.
The crisis suggests that risk management and supervisory practices lagged behind financial innovations and emerging business models. The report notes that RBI has already put in place a system to mitigate liquidity risks at the very short-end, risks at the systemic level and at the institution level.
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