Caution on bankscredit, forex exposure

Written by Banking Bureau | Mumbai, Jan 29 | Updated: Jan 30 2008, 04:34am hrs
The Reserve Bank of India (RBI) in its third quarter review of monetary policy for the year 2007-08 announced on Tuesday has asked banks to be cautious on their credit quality and foreign currency exposures in view of developments in global financial markets.

In view of the risks associated with international financial developments impacting balance sheets of corporates with sizeable external liabilities, banks are urged to review large foreign currency exposures and to put in place a system for monitoring such unhedged exposures on a regular basis so as to minimise risks of instability in the financial system under the current highly uncertain conditions, cautioned RBI. .

Banks are also urged to carefully monitor corporate activity in terms of treasury/trading activity and sources of other income to the extent that embedded credit/market risks pose potential impairment to the quality of banks' assets, said RBI.

In the context of a more open capital account and the size of inflows currently, public policy preference for a hierarchy of capital flows with a priority for more stable components could necessitate a more holistic approach, combining sectoral regulations with broader measures to enhance the quality of flows and make the source of flows transparent, explained RBI.

Developments in global financial markets present several issues that need to be monitored carefully in the context of the implications for emerging market economies( EMEs), said RBI.

First, they face risks from tightening of credit standards in advanced economies.

Second, dependence on imports and higher energy intensity of output may make EMEs more exposed to inflation shocks. Third, in the wake of some macroeconomic and political developments, international financial markets respond differently to the EMEs.