Look at derivatives as hedge against interest rates risks: RBI
Mumbai: Reserve Bank deputy governor Anand Sinha Wednesday asked banks, particularly state-run lenders, to look at derivative products as hedge against risks emanating from interest rate fluctuations.
"Banks, particularly public sector banks are not there in that domain (of using derivatives). In fact, I seriously urge them to look at derivatives to mitigate their interest rate risks," said Sinha, while speaking on the sidelines of banking summit FIBAC 2013.
According to Sinha, several products are being launched to help deal with credit risks, but unfortunately none of them has taken off.
"For example, Credit Default Swaps (CDS), which is another measure of shedding risks for a very long-term project. But that also has not really taken off," he said.
Sinha said asset liability management (ALM) is an important issue which arises at the time of dealing with long-term projects.
"One way to handle this kind of situation is to promote take-out finance as you know several things are being done in that direction," he said.
"On ALM, my perception is that so far the liquidity part has not been a constraint but going forward it might, because of the fact that majority of the banking sector is into retail.
"So you fund yourself from retail deposits and while the composition of retail deposits may change from short-term to long-term or from long-term to short-term, but essentially it remains as a pool," said Sinha.
Sinha feels that apart from the take-out financing route, the seeking of credit risks, securitisation markets, derivative markets need to take care of other aspects of risks.
"We have to see what measures we take. From RBI side, a number of measures have been put into the market. But we have to seriously examine how to stimulate them further," said Sinha.
Sinha is of the view that PSBs, who form about 70 percent of the banking system, have to play a more active role in these markets if these markets are to become vibrant and provide risk mitigation tools.
He agreed that asset quality has taken a hit among Indian banks, adding that there could be many reasons for that.
"One could be, the exuberance of the good times which is now coming home, at least in some cases, the longer term projects. The second of course is the macroeconomic and domestic slowing down. So all these factors are responsible.”
"But that does not absolve from our own home work and that is credit management. That also needed to be substantially toned up," Sinha added.
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