Banks’ high cap need may hit credit flow: RBI

Banks’ high cap need may hit credit flow: RBI

Mumbai: High capital requirements for banks carry the risk of hurting lending to productive sectors in emerging economies, a top central bank official said on Monday.

Managing financial risk for emerging economies is also trickier as most of the sources of risk lie outside their jurisdiction, said Shyamala Gopinath, deputy governor at the Reserve Bank of India.

“Emerging economies are faced with the challenge of managing volatile capital flows which is not a source of systemic vulnerability for developed economies," Gopinath said, at the FSA Turner Review conference in London.

The speech was uploaded on the central bank’s website on Tuesday.

Although a harmonised framework is needed globally to deal with any major financial crisis, there are some key differences like a trade-off between financial stability and financial development in developed and emerging economies, Gopinath added.

“For instance, with regard to identification and mitigations of sources of systemic risk, the emerging market concerns are heightened because of the fact that many sources of systemic risk lie outside their jurisdictions," she said.

Gopinath emphasised on the need to move to exchange traded platforms from over the counter markets in derivative transactions.

To generate more income in exchange traded derivatives, there is need for more volumes and that can come only from leverage, the deputy governor said.

“There is, therefore, need to closely regulate the risk management systems and mandate margin requirements in the form of high quality liquid assets."

Gopinath also said banks must set aside substantial part of their assets for traditional lending given many banks’ high-risk-high-return leverage game with depositors’ money.