Annual Monetary Policy Statement for the Year 2011-12- 3rd May 2011
Part B. Development and Regulatory Policies
71. This part of the Statement reviews the progress in various developmental and regulatory policy measures announced by the Reserve Bank in the recent policy statements and also sets out new measures.
72. The global financial crisis has exposed areas of vulnerability in the financial sector and policy initiatives are underway to strengthen financial stability. Some of the key issues that have arisen in the banking sector are inadequate loss-absorbing capital; insufficient liquidity buffers; excessive build-up of leverage; procyclicality of financial markets; focus on firm-specific supervision and neglect of macro-prudential supervision of system-wide risks; moral hazard from too-big-to-fail institutions; weak governance practices; poor understanding of complex products; and shortcomings in risk management. With a view to addressing these issues, various international bodies, national supervisors and policymakers are engaged in instituting various reform measures at the global and at the national levels. The Reserve Bank has been playing an active role in various international fora, including G-20, Basel Committee on Banking Supervision (BCBS) and Financial Stability Board (FSB), which are engaged in setting standards and formulating policies for safeguarding the financial system.
73. The Reserve Bank has already indicated that it would implement the reform measures under Basel III framework, which are applicable to banks in India. Apart from reforms in the banking sector, the Reserve Bank has also been pursuing reforms in several other areas. It has been actively pursuing the development of various segments of the financial market. In the recent period, financial inclusion has also been recognised as a key objective of policy. In addition, greater emphasis is being placed on the quality of service rendered by banks to their customers. Information technology and payment and settlement services have a crucial role in ensuring not only efficient banking services but also in financial stability, financial inclusion and customer service. It has, therefore, been the endeavour of the Reserve Bank to promote the use of information technology in banks and provide secure and efficient payment and settlement services in the country.
I. Financial Stability
Financial Stability Report
74. It was announced in the Second Quarter Review of Monetary Policy of November 2010 that the Financial Stability Report (FSR) would be regularly published in June and December every year. Accordingly, the second FSR was released by the Reserve Bank in December 2010. The report brought out that the financial sector remained stress-free notwithstanding intermittent volatility, especially in the equity and foreign exchange markets. Financial institutions remained healthy. The stress testing on credit, market and liquidity risks indicated a reasonable degree of resilience of the banking sector in India. The report also pointed to some discernible soft spots such as volatile capital flows, stretched fiscal conditions, persisting inflationary pressure, deterioration in asset quality of banks, regulatory gaps in the non-banking financial sector, and underscored the need for setting up a robust macro-prudential framework for identification of systemic risks.
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