At a time when the global financial markets are fraught with volatility, the Indian central bank is “extraordinary vigilant,” said Y.V. Reddy, governor, the Reserve Bank of India (RBI).
Speaking at Bancon—the annual conference of bankers, being held in Mumbai, Reddy said that although India cannot be immune to global developments, “RBI is actively monitoring the global developments and is in a state of readiness to act, as appropriate, in a timely manner.” He assured an attentive audience that even when large financial conglomerates globally are biting the dust because of large exposures to subprime lending—or the business of underwriting loans to customers with a poor credit history, Indian banks with overseas presence have confirmed that they have insignificant exposure to such loans.
Reddy also said that a problem similar to the subprime crisis is unlikely to occur in India, because the regulator has been vigilant about global imbalances since 2005, and taken several “pre-emptive monetary policy actions” to address evolving monetary, credit and inflation environments.
Reddy said that even though the banks have a modest exposure to sensitive sectors such as capital market and real estate, RBI has ensured that banks have higher provisioning for these areas. The fact that the central bank is the most concerned about maintaining financial stability in the system is amply clear from the Trends and Progress of Banking 2006-2007 report released by RBI on 27 November. In a chapter on financial stability, it said that even while financial markets are becoming more sophisticated, there is a greater need for transparency from officials on “links of systematically important financial institutions and some of their off-balance-sheet vehicles.”
In addition, the report mentions that while complex products, such as credit derivatives and other structured products, make a debut in India, there is “some concern about the rating methodology” in place.
The report also points out that the valuation of these complex products needs to be examined closely.
The report states that policymakers face a delicate balancing act as they must establish frameworks that encourage deepening of the financial markets as well as strengthen risk management systems in good and bad times.
The report notes that Indian banks are now “comfortably placed” because their bad debts, known as non-performing assets (NPAs), as a percentage to the total advances, have declined significantly, and banks are adequately capitalized.
RBI said 79 out of 82 commercial banks in India have a capital adequacy ratio of 10%—higher than the stipulated 9%. Banks are not facing credit risks, as the macroeconomic environment is robust. However, there may be “some degree of market risks” over the short to medium term, the report said.
The report makes a mention of various market segments, which have become highly integrated. It now is becoming evident that the “problem that is originated in the credit markets, spreads quickly to money markets and debt markets.” However, while financial markets are becoming increasingly global, the regulation of financial markets continues to be national. “This deficiency needs to be addressed,” RBI said.