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Survey: Banks robust amid EU crisis

Volatality in global financial markets likely to tighten availability and cost of foreign funding.

Written by Agencies | New Delhi |
March 15, 2012 1:18:58 pm

Given the weak global economic prospects and continuing uncertainties in the international financial markets,the availability and cost of foreign funding for banks and corporate is likely to be negatively impacted.

Indian financial markets,especially currency and equity,performed under pressure during the year.

Global market turmoil resulted in rising risk aversion and moderation in capital inflows that resulted in currency stress during August-December 2011. Although liquidity situation tightened,but countervailing steps helped mitigate the strains. Apart from global economic developments,rising trade imbalance,pace of reform initiatives to boost capital flows,and domestic growth concerns are likely to influence the movements in the Indian financial markets.

These are some of the significant high points in the Financial Intermediation and Markets sector of the Economic Survey-2011-12,presented by Finance Minister Pranab Mukherjee in Lok Sabha today.

While pointing out that sovereign risk concerns,particularly in the Euro countries,have affected financial markets for the greater part of the year,the Survey points at Greece’s sovereign debt problem spreading to India and other economies by way of higher- than- normal levels of volatility.

Emphasising that in a financial system which is bank dominated,the ability of this institution to withstand stress is critical to overall financial stability,the Survey says that Indian banks however remained robust and the financial infrastructure continues to function without any major disruption.

However,the Survey cautions that with further globalization,consolidations,deregulation and diversification of the financial system,the banking business may become more complex and riskier.

Issues like risk and liquidity management coupled with skill enhancement,therefore,assumes greater significance.

An important reason India emerged largely unscathed from the global crisis of 2008 is the strict external commercial borrowings (ECB) policy that places all-in-cost,end-use and maturity restrictions on foreign borrowings by the corporate.

The corporate,were therefore not exposed to balance sheet recession that could have happened due to excessive foreign borrowings. The liberalization of ECB policy,however has to keep in view the need to maintain sustainable levels of external debt.

Other challenges include: innovative steps to bring corporate bond market at the centre stage of infrastructure financing and to meet financing requirements,particularly of the unorganized sector/self-employed in the micro/small business sector. (Courtesy: PIB)

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