The best macro-prudential policies may fall short while addressing a serious economic crisis and such a challenging situation may occur ahead of the system’s ability to foresee it, Reserve Bank deputy governor R Gandhi cautioned today.
He said the challenge is how to establish an implementable framework to deal with the emerging systemic risks at an “incipient” stage itself.
“Future crisis also may not replicate any of the past ones hence history might not always be of help. Complacency may slowly set in even as our memories of the bad times are gradually fading away,” the deputy governor told a conference on financial stability organised by Union Bank and Great Lakes Center for Excellence in Banking and Finance here.
Stating that the role of communication has become challenging in the context of financial stability, he said, “in our own case, even as we plan to move over to the IFRS (international financial reporting standards), there could be changes in the capital requirements to provisions, though nothing might have changed apparently on the ground.
“Businesses all over the world were impacted in general due to demand slump (following the 2008 global financial crisis),” he said and noted that domestic companies too have been hit given the fact that they went ahead with their expansion plans before the crisis, unaware of what was unfolding.
“We do, however, recognise the risks that reckless corporate leverage poses to the financial system and the systemic stability. But the issue needs to be tackled with solutions and timelines that are non-disruptive,” he said.
On the performance of public sector banks, he said, “in terms of public perception, these lenders with the implicit government support, are considered to be relatively immune to destabilising impacts. But the sense of safety evades public sector banks when it comes to their valuations.”
On the government decsion to link recapitalisation to performance, he said “the move is a serious attempt to convey the right signals to all banks to introspect and if necessary redefine their business strategies”, he said.
“In the long-run, the new norms will be value-enhancing for public sector banks. One caveat though that the frictions that hinder the performance of public sector banks need to be eliminated and should be allowed to work on commercial principles,” he said.