Risks to banks increased marginally: Fin Stability Report

Moneycontrol Bureau

Indian banks are yet to complete its journey through rough weather. Risks to the banking sector have increased marginally since December 2012 while the credit quality of commercial banks could worsen further, said the latest Financial Stability Report (FSR) issued by the Reserve Bank of India (RBI) on Thursday.  

"Tight liquidity and deteriorating asset quality are the major contributors to the decline in stability of the banking system over this period, although the asset quality of scheduled commercial banks, has recorded marginal improvement in March 2013 quarter," the report said after conducting a stress test in the financial system.

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The FSR aims to create awareness about the vulnerabilities in the financial system, to inform about the resilience to stress of the financial institutions and to encourage debate on issues relating to development and regulation of the financial sector.

Recently, an online investigative news website had alleged that many banks were selling insurance products while violating mandated norms. Drawing reference from it, FSR urged to ensure compliance of existing Know Your Customers (KYC) and Anti-money Laundering (ALM).

"Instances of mis-selling of financial products, mainly insurance products and other wealth management services at some banks have underscored the need for strengthening consumer protection mechanisms and ensuring adherence to KYC / AML guidelines," it said.

So, what endangers the stability of Indian financial system?

RBI's latest risk survey, conducted during April-May 2013, suggested that global and domestic macro-economic risks were perceived to be the two most important factors affecting the stability of Indian financial system.

"The risks, which have been building up over the last five years of excess liquidity in the global system are now surfacing. The markets, especially, in emerging economies need to be prepared for spells of high volatility and uncertainty going ahead," the report said.

Global scene

Global growth remains subdued and recovery is multi-paced. Policy actions in advanced economies had reduced the risks of tail events. The Federal Reserve's indication of a tapering of its bond buying programme, commencing later this year, has led to large scale sell offs in foreign exchange, bond and equity markets, especially in emerging markets.

Corporate performance

FSR report did paint any rosy picture for the India Inc. With the flagging economy,the performance of Indian corporate sector  has been sluggish, it said while recognising two potential risks including increased external borrowings and un-hedged foreign exchange exposures. These risk factors may further increase their vulnerabilities.

Macroeconomic risks

"Current account deficit and its non- disruptive financing have emerged as major challenges from the perspective of macroeconomic stability. The recent fall in inflation and significant fiscal consolidation have provided some relief," FSR said adding that macroeconomic risks facing the Indian economy have increased during the last six months, mainly on the dimensions of domestic growth, external sector and corporate sector performance.

May wholesale price indexed (WPI) inflation softened to 4.7 percent as against 4.89 percent in April.

saikat.das@network18online.com