19-02-2013, 03:49 PM
INDIAN BANKS MAINTAIN ROBUSTNESS AMIDST EURO ZONE CRISIS
GOVERNMENT MEASURES MITIGATE LIQUIDITY STRESS
ABSTRACT
Given the weak global economic prospects and continuing uncertainties in the
international financial markets, the availability and cost of foreign funding for banks and
corporate is likely to be negatively impacted. Indian financial markets, especially currency
and equity, performed under pressure during the year. Global market turmoil resulted in
rising risk aversion and moderation in capital inflows that resulted in currency stress during
August-December 2011. Although liquidity situation tightened, but countervailing steps
helped mitigate the strains. Apart from global economic developments, rising trade
imbalance, pace of reform initiatives to boost capital flows, and domestic growth concerns
are likely to influence the movements in the Indian financial markets. These are some of the
significant high points in the Financial Intermediation and Markets sector of the Economic
Survey-2011-12, presented by the Finance Minister, Shri Pranab Mukherjee in Lok Sabha
today.
While pointing out that sovereign risk concerns, particularly in the Euro countries,
have affected financial markets for the greater part of the year, the Survey points at Greece’s
sovereign debt problem spreading to India and other economies by way of higher- thannormal
levels of volatility. Emphasising that in a financial system which is bank dominated,
the ability of this institution to withstand stress is critical to overall financial stability, the
Survey says that Indian banks however remained robust and the financial infrastructure
continues to function without any major disruption. However, the Survey cautions that with
further globalization, consolidations, deregulation and diversification of the financial system,
the banking business may become more complex and riskier. Issues like risk and liquidity
management coupled with skill enhancement, therefore, assumes greater significance.
An important reason India emerged largely unscathed from the global crisis of 2008 is
the strict external commercial borrowings (ECB) policy that places all-in-cost, end-use and
maturity restrictions on foreign borrowings by the corporate. The corporate, were therefore
not exposed to balance sheet recession that could have happened due to excessive foreign
borrowings. The liberalization of ECB policy, however has to keep in view the need to
maintain sustainable levels of external debt. Other challenges include: innovative steps to
bring corporate bond market at the centre stage of infrastructure financing and to meet
financing requirements, particularly of the unorganized sector/self-employed in the
micro/small business sector.