BackGovt to work on framework for too big to fail institutions
The Financial Stability Development Council (FSDC) met for the 15th time on Tuesday since its formation in December 2010 to deliberate on the macroeconomic situation
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New Delhi: The government and financial sector regulators are looking to develop a framework for identifying financial institutions that are too big to fail.
While the Reserve Bank of India (RBI) has already identified systemically important banks, it seems the government is looking to extend the exercise to cover areas such as insurance as well.
This was discussed at the meeting of the Financial Stability and Development Council (FSDC) chaired by finance minister Arun Jaitley and attended by other financial sector regulators and finance ministry officials in New Delhi on Tuesday.
“The council discussed issues relating to developing a comprehensive framework for identification of SIFIs (systemically important financial institutions) across all sub-sectors of the financial sector," said a finance ministry statement.
SIFIs are institutions whose failure could have a cascading impact on the financial system. Last year, for the first time, RBI designated State Bank of India and ICICI Bank Ltd as too big to fail. This will now be an annual exercise, with RBI bringing out a list every year.
However, other regulators such as the Insurance Regulatory Development Authority of India have no such rules that could potentially see big insurance firms such as the Life Insurance Corporation of India come under the SIFI tag.
At the FSDC meeting, measures taken by the government and RBI to tackle rising bad debt in the banking system were also discussed. Jaitley pointed out that the major challenges before the government are to improve the overall performance of state-run banks, make stalled projects functional and economically viable and increase private sector investment.
FSDC also discussed the uncertainty in the global economy and high volatility in the financial markets that pose risks to emerging market economies, but said India was much better placed to tackle the risks given its macroeconomic stability and large forex reserves.
Increasing volatility in the global financial markets in the aftermath of the June referendum favouring the UK’s exit from the European Union, or ‘Brexit’, has emerged as one of the major concerns of policymakers across the world.
“With the revival of sentiment and certain signs of a pick-up in industrial activity, a good monsoon is expected to further strengthen growth in India. Members agreed on the need to continue to be in a state of preparedness for managing any external sector vulnerabilities, including those emerging from Brexit and its consequences," the statement said.
Moody’s Investors Service, in a note on Tuesday, said the implications of Brexit on India’s financial markets will be limited.
“Exports to the UK and the rest of the European Union account for 0.4% and 1.7% of India’s GDP (gross domestic product), respectively. Only a very large and prolonged slump in imports from these regions, which is not our baseline assumption, would markedly dent India’s exports. In addition, India’s small current account deficit and low levels of external debt imply that it is not significantly exposed to a potential sharp fall in capital flows to emerging markets. Rather, in the near term, India’s growth challenges reflect factors that pre-date the UK referendum," it said, listing lacklustre global demand and its impact on exports, two years of drought that has dampened rural consumption, high leverage levels of some large corporates and the impaired assets in the banking system as some of the challenges facing the Indian economy.
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