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Thursday, December 18, 2008

India, with its strong drivers of growth, may escape the worst consequences of the global financial crisis - RBI

Trend and Progress of Banking in India, 2007-08

(If you wonder "Why banks are not cutting interest rates for home loans above Rs. 20 lakhs?", you can find answers in this report. Banks are not interested in the "risky ventures". However, RBI says, you are free to play the risky game of investing at unreasonably priced real estate on your own!

At the same time, Banks do not want property rates to come down because it will create "asset and liability mismatch"!)

Once the global situation is stabilised, confidence is restored, India would return to its high growth trajectory - RBI

Prevent asset-liability mismatches:

At present, the challenge is to meet the credit demand without impacting credit quality. Banks have to monitor their credit portfolios closely and take corrective action to prevent asset-liability mismatches, keeping a look at business cycles and monetary policy measures, RBI said.

Macroeconomic developments:

Banks need to ensure that their business decisions are guided by the long-term perspective of macroeconomic developments and are not unduly influenced by the current stream of exceptional events.

Credit to productive sectors:

However, RBI also urged banks to ensure that flow of credit to productive sectors does not get affected. Though the initial impact of the crisis in India has been limited, some tremor has been felt through the credit, equity and the foreign exchange markets, the report pointed out.

Deposits - safe & protected:

It also said that Indian financial market is safe and Indian depositors enjoy a high degree of protection. About 93% of deposit accounts and 61% of total assessable deposits were fully protected at March-end 2008.


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 emerging 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.

Risk management in Indian banking system:

Talking 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.

Synthetic securitization:

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 Times of India

Related Stories:

1) At present it is difficult to speculate about the trajectory of global downturn and its consequent fallout for the Indian economy - RBI

2) Banks must manage risks associated with real estate: RBI
"The dangerous inter-dependence between real estate cycles, bank crisis and the ultimate threat to financial stability

3) Can our banks weather the financial crisis? - PSM Rao
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