Dr. Debesh Bhowmik
RBI’s Financial Stability Report ,2011 shows that the domestic financial system remains robust.The report is ‘very confident’ about the stability of the Indian financial system.It identified risks arising from asset quality followed by market volatility and global risks and hopes adverse macroeconomic developments . The domestic demand (private and government, consumption and investment) have decelerated.The Inflationary pressures remain elevated,. Exchange rate depreciation has inflationary implications.Deficit in BOT increased. The fiscal position remains challenging.Currency market is strongly volatile with depreciation of Rupee. Repayment/ redemption of ECB and FCCB would become costlier.Equity market requires monitoring. There has been some deterioration in financial soundness indicators (viz., capital adequacy and asset quality) but capital adequacy remains well above regulatory requirements and asset quality indicators continue to compare favourably with ratios in peer countries and if GDP growth slows down, there could be some downstream impact on asset quality.So, additional capital will need to be raised due to the compulsions of implementation of Basel III.Banks’ profitability may increase due to higher interest rates.But, Urban banks and NBFCs also exhibited resilience to credit risk shocks.Insurance and pension sectors can stabilize financial sector.RTGS system will create faster in payments,banks and institutions could have contagion impact,
The Financial Stability Report ,2011 observes that the domestic financial system remains stable in the face of an adverse international backdrop. Market participants and stakeholders in India reposed their confidence in the stability of the domestic financial system and stringent stress testing brought out the resilience of the system. Financial Stability Report , however, points out some soft spots that need to be addressed, going forward. Euro crisis weakened growth and accelerates inflation,depreciates Indian currency and fiscal system became challenging.
The FSR has introduced some new tools for risk assessment. These are Systemic Risk Survey and Systemic Liquidity Indicator in addition to network model introduced in last FSR.
Stability measures too have been enhanced to model the distress dependencies in the banking sector, among specific groups of banks and that associated with an individual bank. Finally, a series of macro financial stress tests were done to focus on the impact of macroeconomic shocks on the financial system recognising the fact that the worsening of credit risk conditions is one of the most dominant sources of bank risk. The probability of distress of entire banking system was observed to be very low during the recent period. Also, the expected number of banks that become distressed given that at least one bank becomes distressed has been low and stable for the last one and half years.