Funding constraints in the international financial markets could impact the availability and cost of funding for banks and corporates, cautioned the Economic Survey 2011-12.
Sovereign risk concerns, particularly in the Euro area, affected financial markets for the greater part of the year. The contagion of Greece's sovereign debt problem spread to India and other economies by way of higher-than-normal levels of volatility.
While Indian banks are not expected to bear any direct impact on account of their negligible exposure to the troubled Euro zone, they could be indirectly affected on account of funding pressures, it said.
The Survey suggested that the scope for a counter-cyclical financial policy could be explored in financial regulation. This will minimise negative impact of accumulated financial risks. Further, it will go a long way in providing the required stability to the financial system.
The recent regulatory prescriptions for European banks have raised fears of deleveraging.
Indian banks robust
The Survey observed that despite a decline in capital to risk-weighted assets ratio and a rise in non-performing asset levels in the recent past, Indian banks remain robust. Capital adequacy levels remain above the regulatory requirements.
With further globalisation, consolidation, deregulation, and diversification of the financial system, the banking business may become more complex and riskier. Issues like risk and liquidity management and enhancing skill therefore assume greater significance, it added.
ECBs
The Survey recommended that liberalisation of the External Commercial Borrowing policy has to keep in view the need to maintain sustainable levels of external debt ratios.
This is more important because of the fact that high levels of external debt ratios contributed to the Balance of Payment crisis of the early 1990s.
Infrastructure finance
Pointing out that infrastructure finance remains a constraining factor with heavy dependence on bank financing, the Survey said development of the corporate bond market is the key to infrastructure development.
While introduction of Credit Default Swaps is expected to help in the process, the Survey suggested that innovative steps are needed to bring the corporate bond market to the centre-stage of infrastructure financing.