Margins Of Banks Likely To Come Under Pressure

The Tarapore Committee has stated that a direct fall-out of capital account convertibility will be increasing pressure on the margins of banks.

This will arise partly out of greater competition and partly due to the disintermediation process gathering momentum with strong domestic corporates accessing world markets directly.

To minimise the impact of such vulnerability, the committee has suggested bringing about greater uniformity in the financial system by the introduction of similar prudential measures for banks, non-banks and financial institutions.

The committee has made the following recommendations to strengthen the financial system :

To obtain a level playing field between banks and non banks, a uniform regulatory system needs to be put in place with regard to prudential norms, market participation, reserve requirements and the interest rate regime.

Gradual introduction of reserve requirements for FIs commensurate with their operations has been suggested. Within the scope of this, the committee has recommended an overall, gradual reduction in reserve requirement.

lWith regards to non-resident liabilities, the committee recommended that reserve requirements on such liabilities and overseas borrowings of banks, non banks and financial institutions, should be at least on par with those on domestic liabilities. Furthermore, the committee has suggested the use of cash reserve ratio (CRR) on non-resident liabilities and overseas borrowings as one of the instruments for moderating capital inflows.

To hedge against volatility of interest rates/exchange rates in international markets which would get transmitted to the domestic markets as a result of the capital account convertibility, the domestic financial system must be sufficiently equipped to withstand these risks.

The banks are yet to put in place adequate asset liability management (ALM) systems, even for the risks on the rupee books and integrate their money, gilts and forex operations.

The committee felt that risk management is a critical area which warranted attention. Towards this the committee made several recommendations including, implementation of strong internal control

systems to identify, measure, monitor and manage all types of risks.A gradual introduction of reserve requirements for FIs commensurate with the level of their operations has been suggested