Concerned over inflation and credit quality in the phase of economic growth moderation, the Reserve Bank of India (RBI) plans to revamp the liquidity risk management framework for banks soon.
?We are examining the issue of banks establishing a more robust liquidity risk management framework that is well integrated into the bank-wide risk management process,?? said RBI?s Report on Trend & Progress of Banking in India 2007-08, released on Wednesday.
Basel Committee on Banking Supervision (BCBS) has published Priniciples for Sound Liquidity Risk Management and Supervision in September 2008, raising standards for sound liquidity risk management. It provides detailed guidance on the importance of establishing liquidity risk tolerance, maintenance of adequate level of liquidity through a cushion of liquid assets, identification and measurement of a full range of liquidity risks.
?RBI is studying the guiding principles contained in the document for early implementation,?? said the report adding that the ongoing market turmoil has re-emphasised the importance of risk management, especially liquidity risk management, in the functioning of financial markets and banking sector. RBI said greater market and institutional resilience mandates large capital and liquidity buffers by banks and financial institutions to face any internal and external shocks. This will minimise the pro-cyclical effect?the tendency of banks to gloss over risk during good times and become extremely risk-averse during bad times?explained RBI.
The central bank has further said that based on the experience gained on the functioning of the financial conglomerates, a suitable framework for monitoring and supervision is being framed.
Also, an internal working group on RBI is examining on how to strengthen the supervision of the overseas operations of Indian banks through off-site returns, informal interaction and exchange of information with host country supervisors and occasional on-site visits.
RBI said inflation is above ?acceptable? levels and that, along with slowing growth, it is making monetary policy management more complex. ?The task of conduct of monetary policy has become more complex than before,? the report said.
RBI had taken the monetary measures in an environment of heightened uncertainty and supply constraints impacting the growth momentum in the domestic economy, the report said. Moderation in the rate of economic growth is the current policy concern but the economy should return to its high growth trajectory once global conditions return to normal, it observed.
?The overall long-term macroeconomic outlook continues to be favourable with moderation of growth being the current policy concern?, said the central bank. Further, RBI said an industrial sector slowdown could adversely affect the profitability of the corporate sector and credit risk.
