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RBI Speaks on Emerging Challenges to Financial Stability

Emerging Challenges to Financial Stability
Savvy Midha
| Updated: Nov 28, 2019 | Category: RBI Advisory

RBI Governor Mr Shaktikanta Das, after taking over his office has given 8 speeches concerning the financial and monetary conditions of India. Recently, on 19th August 2019 at the conference, he talks about the subject “Financial Stability” affirming his concerns relating to emerging challenges to financial stability. 

Before understanding the results of the speech, let us know in brief about how the central banks operate. 

History of Central Bank all over the World

Ever since Central banks keep shifting its attention from one stability to another. Central banks have been initiated to stabilize the scenarios prevailing at that time, such as central banks in England and France were undertaken to stabilize war conditions, in Sweden to stabilize the issues relating to currency.

US Federal Reserve was initiated in the 20th century for financial stability because the country suffered panic in the year 1907. In this period, inflation was never a problem as commodities and gold-backed currencies. In the era of World War I, mismanagement in money leads to hyperinflation in Germany that bough the attention of Central banks primarily to focus on Price Stability.

However, after the world war was over central bank becomes the prime issuer of currencies and operated with the main objective of price stability and financial stability. During the period in late 2008 when the world’s financial sector faced the highest instability even though price remained stable for years creates the environment due to which the faith of the public in the financial market seems to get disappeared.

Ten years after the crisis, though price remains stable now financial markets again demand concern due to ongoing trade conflicts between the US and China affecting the Global Economy. However in this era, Central Banks assured the condition is much better off than compared to the situation back then in 2008, which was hard to believe by the market participants as the same was assured in 2008.

Financial Stability as per Indian Economy

During the 2008 crisis, the trajectory in the Indian Economy was much different from the rest of the world. Indian Economy suffered price instability in the span of the period 2008-2013 with inflation range between 8 to 10 percent. Due to the continuation of price instability, the Indian Economy began to adopt an inflation target regime that enables to bring inflation down to 3% to 5%. 

At present, problems shifted to the NBFC sector where fraud and mismanagement have created a solvency crisis which is creating troubles for those mutual funds who had invested in NBFCs. Credit Rating agencies are also blamed for the same as they lack the proper system in place for assigning adequate credit ratings to financial players.

Highlights from the speech of RBI Governor 

Mr Das stated in his speech that in spite of years have passed after the crisis, still the financial reform remains uneven. The current state of the banking sector is also uncertain. With digital innovation, banks faced competition from non-traditional players such as Fintech and Bigtech. The developments of these players lead to financial stability in an emerging economy like India. Regulatory authorities play an essential role in providing a framework that enables the operations of banks and non-traditional players.

Financial Intermediaries such as Banks play a dominant role in the credit market. Banking Sectors are monitored continuously to ensure the health of the banking sector remains stable. He added in his speech by stating about the new norms initiated with effect from June 2019 concerning stressed asset, which has been declined with the introduction of related norms. He also disclosed the initiative of RBI that is in the process to build supervisory and regulatory cadres for governing and supervising operations of banks and non-banking institutes. The governor of RBI also highlighted the importance of risk management system, compliance functions, and internal control mechanisms should be in place to strengthen the bank and its functioning. 

Wrapping up the Article

Increased currency and debt crises occurring globally have called for the careful regulations and supervisory authority to monitor financial markets. New entrants in Financial Sectors such as fin-tech, big-Tech, NBFCs are completely modifying the phase of how the financial sector operates. 

These new players have added the potential of growth in financial services by the provisions of payment, remittances, and cross- border payments. These players have the potential to grow and become a large financial institution that raises concerns over financial stability in India.

Mr. Das, in his speech reflected his concern relating to the new challenges that are emerging that continuously deals with RBI by regulating frameworks to adapt itself with the evolving and dynamic scenario.

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