Robust mechanism needed for risk sharing

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

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

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

The study notes that the next generation of financial marketreforms in India will need to focus on four interrelated areas whichinclude taking equity market development to a higher level, developingand deepening corporate bond markets, developing markets forderivatives and securitisation, strengthening the institutionalinvestor base, including pensions, insurance, and mutual fundindustries, and improving market regulation and strengthening riskmanagement, in the face of a more complex financial sector and greatervolatility.

While acknowledging India's readiness to go in for capital accountconvertibility, the study cautions that certain conditions will have tobe fulfilled before the capital account is fully liberalised. Theseinclude developing and insuring compliance to sound risk managementpractices, maintaining global standards in provisioning, capitaladequacy norms and reporting requirements, strengthening bankingsupervisions, close monitoring and regulation of short-term withadequate exposure and reduced dependence on one-way inflows.

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

Furthermore, the study points out that a diversified financialsystem with appropriately developed markets and mechanisms for risksharing and risk transfer is required to enhance the risk-bearingcapacity of the economy as a whole. Such a system enables marketparticipants to manage and transfer risks to those more able andwilling 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