Robust mechanism needed for risk sharing and transfer: Joint study

Mumbai, Jan 14: The FICCI today said that a joint study undertaken by them, the World Bank and CRISIL has reached the conclusion that the sustenance of India's economic growth hinges on augmenting the supply of long-term local currency and creation of robust mechanisms for risk sharing and risk transfer.

While long-term local currency funds are needed to finance the country's much-needed infrastructure, development of new instruments to serve the broader financial needs of firms and households depends on a robust mechanism which can enhance risk-bearing capacity of the economy as a whole.

In this backdrop, FICCI's two-day Capital Markets Conference, (CAPAM) beginning January 15 in Mumbai will focus on the theme of key challenges and opportunities in developing markets for long-term finance, an FICCI release said.

The study notes that the next generation of financial market reforms in India will need to focus on four interrelated areas which include taking equity market development to a higher level, developing and deepening corporate bond markets, developing markets for derivatives and securitisation, strengthening the institutional investor base, including pensions, insurance, and mutual fund industries, and improving market regulation and strengthening risk management, in the face of a more complex financial sector and greater volatility.

While acknowledging India's readiness to go in for capital account convertibility, the study cautions that certain conditions will have to be fulfilled before the capital account is fully liberalised. These include developing and insuring compliance to sound risk management practices, maintaining global standards in provisioning, capital adequacy norms and reporting requirements, strengthening banking supervisions, close monitoring and regulation of short-term with adequate exposure and reduced dependence on one-way inflows.

Past experience, especially the East-Asian crisis, according to the study, calls for better management of risks. The risks need to be identified, quantified and monitored on an ongoing basis. In other words, prudential norms that minimize the risk of open capital accounts need to be in place. It is, therefore, critical to have a robust financial infrastructure with strong provisioning, disclosure/ reporting requirements, greater transparency and accountability in government, capital adequacy norms and accountancy practices for better risk management.

Furthermore, the study points out that a diversified financial system with appropriately developed markets and mechanisms for risk sharing and risk transfer is required to enhance the risk-bearing capacity of the economy as a whole. Such a system enables market participants to manage and transfer risks to those more able and willing to bear them, and helps maintain overall market stability.

In this context, the development of securitization and derivatives markets assumes a central place, the study adds.

UNI