This year’s theme, ‘Lessons from the financial turmoil’, is quite apt for the present times, for we have just experienced one of the worst financial crises all over the world. The year just gone by has been one of the toughest years for the world economy. Due to which, in recent times, a recession has been experienced the world over.
The current disposition in the financial markets could be put down to four major reasons. Firstly, over confidence among market participants that ample liquidity would continue to prevail, providing an outlet for new products and facilitating rapid growth. Secondly, the lack of transparency and inadequate disposal in the spate of many highly structured financial products, complicating their dimension and reducing secondary market liquidity under conditions of stress. Thirdly, a series of misaligned incentives, which led to the watering down of credit policy standards and encouraged excessive risk taking. Fourthly, the risk was passed on from one institution to another and finally it landed in institutions where Central Bank’s control was almost nil. In other words, high over exposition of the banks created problems of financial stability.
The global turmoil called for consulted and co-ordinated action between governments and central banks on the one hand and across governments on the other. Stimulus packages worth trillions of dollars were pumped into economies all over the world to stimulate demand and propel economies towards growth. Central banks reduced their key interest rates and took various measures to instil confidence in the people about the financial system. Due to all the efforts made by governments and the central banks, positive signals are emerging from the developed world. There are signs of revival, of consumer spending and employment levels in the US. There is evidence of household spending stabilising. Recently, the International Monetary Fund also indicated that the world economy is starting to pull out of the recession and hiked the growth forecast for the world economy for next year. IMF forecast a global growth of 2.5% in 2010, led by strong growth in China and India, a rebound in Japan and a slightly lower growth in the US. It has upgraded its forecast for Europe, even though it expects the Euro Zone to contract by 0.3%.
India did not witness problems related to subprime mortgage, toxic derivatives, bank losses, credit crunch and mistrust between banks. The main reason for our condition was the cautious approach adopted by RBI and Indian banks for introducing any new product in the market. Since we are integrated with the global economy, we could not escape the adverse effects of the global slowdown. Fortunately, with all of our constraints, we could take appropriate steps in the right direction, which enables us to tide over the situation without many problems. The better-than-expected GDP numbers for FY08-09 improved sentiments in the market and industrial production is showing improved performance in the last two months of the current financial year.
I congratulate the banking system for exhibiting resilience during this critical period and also the RBI for providing a supporting and facilitating environment for the banking sector to sustain during this stressful period. This is the time to improve their operational effectiveness, which would help them to meet the challenges of the future, which is still uncertain.
One more area where our banks, especially state-owned banks, played a greater role, is in meeting social obligations in the larger interest of society. By now, our banks are equipped to handle both, social obligations and commercial banking, with equanimity. It is our endeavour to encourage the concept of inclusive growth so that the benefits of our overall development are enjoyed by every section. Inclusive growth remains the key for sustainable growth in the years to come.
Recognition of good work remains in the memory for a long time. And I understand that the best banks have been chosen on the basis of important parameters such as profitability, growth, efficiency, credit quality and strength and soundness. In the present economic scenario, credit quality and strength are of great significance. The global turmoil affected the strength of the system as a whole. Capital and risk management are quite critical for banks. Banks have to fine-tune their risk management system to save on their capital. Profitability, growth and efficiency are also important for the banking system. To excel in all these five parameters requires meticulous planning, dedication to work and implementation of ideas.
I congratulate the winners for their hard work and dedication. I urge them to continue their good work in the future and also urge other banks to improve their efficiency in these fields, to offer healthy competition to the winners, which would definitely improve the overall performance and efficiency of the system as a whole and help to maintain financial stability.
?Speech by finance minister Pranab Mukherjee