India should continue with the process of strengthening prudential, provisioning and capitalisation norms and bringing them in line with the best international standards to reduce the possibilities of future financial crises, says Bimal Jalan, a former RBI Governor, in his new book set against the turmoil in the financial sector over companies like IL&FS going into deep trouble.
"It is equally important to continue with efforts to introduce maximum transparency, disclosure and accountability so that investors and counter parties to financial transactions can take their decisions based on full information and their own assessment of market and other risks," he says in his book "India Ahead 2025 and Beyond" (Rupa).
Jalan, a former Finance Secretary and Chairman of the Economic Advisory Council to the Prime Minister, says tighter and tougher prudential standards will no doubt cause some pain and impose greater responsibility on banks and other financial institutions.
However, given the new international focus and externalities and linkages involved, the regulation of the financial sector is no longer a matter of choice or domestic concern alone. Over a period of time, it is likely that the willingness of the rest of the world to do financial business -- either by way of trade credits, direct investments or other types of investments and loans -- will depend on their confidence in India's financial practices.
India must, he says, thus, remain ahead of the curve in its prudential management.
Referring to the problem of non-performing assets (NPAs) in banks, Jalan says in future a vigorous effort has to be made by all banks to strengthen their internal control and risk-management systems, and to set up early-warning signals for timely detection and action.
Henceforth, the resolution of the NPA problem also requires greater accountability on the part of corporates, timely disclosures in the case of defaults and an efficient credit information system. With the help of stricter accounting and prudential standards, the problem of NPAs could be effectively contained in the future.
As one who had helmed the central bank, Jalan says in future a sensitive and controversial question which would also need to be faced, sooner or later, is whether the "public sector character" of our banks and other institutions, which dominate India's banking sector, is consistent with their being able to play a globally competitive role.
In order to consider this issue dispassionately, both the advantages and disadvantages associates with this particular characteristic of the financial system have to be recognised.
An important advantage, he says, is the reduced "vulnerability" of the system as a whole, because of sovereign ownership. Another important advantage is its wide reach and the availability of an established institutional infrastructure.
Important disadvantages, however, are the relative insensitivity of the system to its cost structure, inability to respond quickly to changing market trends and greater rigidities in the management decision-making processes because of what may be described as non-commercial considerations.
While the globalisation of financial markets and explosion in private capital flows has been mostly positive, it has to be recognised that these have also substantially increased the risks from external factors.
In the light of the repeated financial crises during the past three decades, developing economies need to realise that there is an urgent need to examine the role of finance from a new, complex, interactive and systematic perspective, the book says.
Jalan, who was a nominated member of the Rajya Sabha from 2003 to 2009, also says risks from geopolitical threats, demographics, technology and climate change may be huge. To offset these risks, countries should give much greater weight to the markets, to rebalance the current over-dependence on debt.
(V.S. Chandrasekar can be contacted at email@example.com)
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