The Reserve Bank of India (RBI) released its third Financial Stability Report (FSR) on 14 June 2011. The report reflected RBI's continuing endeavour to communicate its assessment of the incipient risks to financial sector stability. It stated that the Indian financial system remains stable in the face of some fragilities being observed in the global macro-financial environment.
According to the FSR, the uncertainties in global environment with persistently high energy and commodity prices contributed to a slight moderation in India's growth momentum as well. The macro-economic fundamentals for India continue to stay strong despite the prevailing inflationary pressures and concerns on fiscal fronts.
The FSR focussed on risks to the system arising out of interplay of the disparate elements of the financial sector infrastructure namely- the macroeconomic setting, policies markets and institutions.
The report pointed out that economies around the world slowed down even as the risks from global imbalances and sovereign debt crises remained. India's growth momentum too slackened mainly due to the uncertainties in the global environment characterised by high energy and commodity prices.
FSR Findings
Two of the most significant findings of the FSR are:
1. The banking sector in India by far the most dominant portion of the Indian financial sector continues to be stable and
2. The domestic financial markets have remained stress free recently. However, a few caveats are in order.
The report however did not mention that those Indian firms are relying increasingly on external sources of finance, mostly euro-commercial borrowings. The reliance resulted in currency mismatches. The well-known problem in the derivatives segment in which uninformed companies sold unhedged products has had disastrous consequences. The aggressive selling of an essentially speculative product cost the banks dear.
FSR, does mention though the other great risk arising out of an unbridled access to foreign currency borrowings by Indian companies. Many of them who issued foreign currency convertible bonds (FCCB) may face refunding risks at the time of conversion by March 2013. The conversion price of these FCCBs is said to be substantially higher than the prevailing market price and the differential is unlikely to narrow.
Banks had aggressively expanded their credit portfolio to accommodate their borrowers. In the process they came to rely on high cost funds such as those mobilised through certificates of deposits (CDs). Resource mobilisation on those terms is generally for shorter periods and hence contributes to the risk of asset-liability mismatch.
Incremental credit, the FSR pointed out tended to concentrate on a few sectors such as retail lending (including home loans), commercial real estate and infrastructure. Although, the banks are not over- exposed to these sectors, the fact remains that lending to some of these sectors has become a fashion even among public sector banks.
The FSR is a mine of credible, well researched information that are of immense benefit to many sections.
About Financial Stability Report
The Financial Stability Report is published twice a year under the guidance of the interim Financial Policy Committee. The report includes Committee's assessment of the outlook for the stability and resilience of the financial sector at the time of preparation of the Report, and the policy actions it advises to reduce and mitigate risks to stability.
