Banks must do more in resource allocation

Banks will have to play a greater role in resource allocation, given the tough conditions in the capital market, the Reserve Bank of India said in a report on Friday. “The capital market conditions are not enabling effective disintermediation in the financial system. Bank and non-bank firms, therefore, have to assume a larger role in resource allocation in the economy,” RBI said in its Financial Stability Report (FSR).

The report highlighted the drop in resource mobilisation through the primary market and also the redemption pressure faced by mutual funds during 2011-12 period.

“Mutual funds faced redemptions, pushing the net resource mobilisation to negative zone in 2011-12.

Except for the gold exchange traded funds, balanced schemes and equity schemes other than equity linked savings schemes, all other schemes faced sizable redemptions,” the report said. Bulk of the borrowing during 2011-12 took place through non-convertible debenture issues of the public financial and infrastructure institutions, the report said.

The FSR said long periods of weakness in primary capital markets could accentuate the trend of growing leverage in the corporate sector. Capital raised through IPOs and FPOs during 2011-12 was substantially lower than the previous year.

The recent uptick in the IPO market was termed as a ‘welcome development’ by RBI. Highlighting the substantial foreign inflows in this calendar year, the FSR warned “any adverse developments in the Euro area or on the unraveling of the US fiscal cliff issue could potentially lead to a sudden reversal of FII inflows from the Indian equity markets, leading to a substantial correction in the indices.” It also pointed out the Indian market had rallied despite overall economic weakness on account of investor optimism about the renewed pace of reform measures announced by the government.

The benchmark Sensex index has gained about 26 per cent so far in 2012, while foreign investors have invested over Rs 1,27,500 crore ($24 billion) during this period.