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8/10/2019 Assignment 1 Tm

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ASSIGNMENT 1

TREASURY MANAGEMENTSUBMITTED BY

314141VATSAL MAGAJW


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INTRODUCTION

This assignment is concerned with the Ninth issue of Financial Stability reportreleased by the

Reserve Bank of Indiaon 26th

June 2014.

The Financial Stability Reportreveals the assessment of Sub Committee of (FSDC) Financial

Stability and Development Council, on risk to financial stability. The main purpose of the

report is to create awarenessabout what is happening in the financial system, to give

information regarding the flexibility of the financial institution and also to take into

consideration the issues related to the regulation and development of the financial sector.

This report shows the sign of improvement in stabilitybut the growth has not been achieved in

terms of monetary policy, capital markets and saving investment balance. Still efficient

implementation of these policies and programs have not taken place. Some stringent actions have

to be framed by the government and the restriction limit is to be fixed by the government on

these policies.

The report brings following points in notice:

Financial system remains constant.

Banking sector risk especially public sector banks have increased since December 2013

as shown by the banking stability indicator.

Improvement in asset quality of Scheduled Commercial Banks but Non Performing

Advances of these banks is higher as a percentage of total advances compared to other

banks.

Capital to risk weighted asset ratio is maintained above the minimum regulatory

requirement even in the adverse macro-economic condition.

Although the security market is connected with the International norms and policies, the

AUM of mutual fund industry is not taking risk if we compared with the international

standards. Also revised limits on the lending activities of insurance companies has to be

framed for the purpose of eliminating the arbitrage. From the viewpoint of pension

scheme, several pension defined benefit schemes lead to the fiscal stress in the coming

years.


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IMPORTANT ASPECTS OF THE REPORT

MACRO FINANCIAL RISKS

Global Backdrop:

Due to globalization every economy is facing problems due to the problem faced by the

other economy. For example: Euro Zone crisis which affects other economy also.

Increasing volatility, tougher monetary and fiscal policies plays a severe role in emerging

market and developing economies (EMDE) including India which brings stability and

confidence to reduce the risk happening in other countries i.e. qualitative and quantitative

risk in Japan, Geo political risk in Iraq, Eastern Europe and Asia Pacific region.

Domestic Economy:

The risk faced by an Indian economy is reducing between December 2013 and March

2014 provided that if following measures are taken:

- Strengthening of monetary policy.

- Measures to be taken to limit the gold imports which help in reducing the current

account deficit.

- Formation of new government has created political risk which has led to expectation

of proper implementation of new policy so that it had a positive impact on the

markets.

Savings and Investments:

With the increasing inflation and less domestic growth, there is an adverse effect on the

savings and investments. Housing expenditure keeps on increasing on one hand and on

the other hand increasing inflation pull down the financial saving and people will take

high risk by investing in gold.

Corporate Bond Market:

There is an increasing growth in the corporate bond market during the last five years. But

compared to the G-Sec the corporate bond market is lagging behind. Most of the

investors invest in public sector financial institution with the purpose of getting safety,

liquidity and return. Due to certain constraints like credit risk transfer mechanism is the

reason for declining growth in the corporate bond market.


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Fiscal Constraints:

The present reduction in the fiscal deficit is possible due to reduction in plan expenditure

and collection of non-tax revenue which is not recurring in nature. The net borrowing of

the government for 2014-15 is 4570 billion which is lower than the last fiscal year.

Therefore reduction in net government borrowings and planned expenditure will leave

more resources for the private sector.

External Sector:

There is an improvement in the external sector due to reduction in the current account

deficit, exchange rate stability and improvement in cash inflows. The cash inflows via

NRI deposits in 2012-13 was 15 USD Billion and it increased to 35 USD Billion.

Similarly current account deficit fell from 4.7% in 2011-12 to 1.7% in 2012-13.

Corporate Sector Performance:

From the above graph it is clearly seen that, there is an improvement in the performance of

corporate sector in terms of profitability, liquidity, sustainability, turnover as compared to the

last fiscal year.


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FINANCIAL INSTITUTIONS

Following points are observed:

Banking sector risks(especially public sector banks) have been increased at the end of

March 2014 as suggested by the Banking Stability Indicator which has an impact on other

risk dimension. But on the other hand there is an improvement in quality of assets due to

sales of Non-Performing Assets and the overall improvement in asset quality by banks

but still there is a concern on liquidity and profitability.

Stress testindicate that there must be a provisionto meet the expected losses of bank

under the adverse economic condition. There is a stress on the system due to pressure of

profitability and liquidity. There is also a decline in growth of risk weighted assets along

with the decrease in Tier 1 ratios which means that more efforts have to be taken for

repairing the balance sheets.

Sectors contributed to the stressed advances:

The share of these stressed sub sector to the total advances of Scheduled Commercial bank is

24% where infrastructure is accounting for 14.7%. In case of public sector banks this ratio was

27.3%


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FINANCIAL SECTOR REGULTION AND INFRASTRUCTURE

Following points are observed:

Indian banks will migrate to Basel III to form a strong position in the market but there is

a possibility in the form of high cost of capital.

Stringent rules have to be framed for the new principle of Financial Market Infrastructure

which is issued by the Committee on Payment and Settlement System (CPSS) and

International Organization of Security Commission(IOSCO) which helps in

mitigating the risk of domestic counterparties.

There is a rise in the distress dependenciesbetween the banks. It reveals that importance

of the most connected banks have been increased resulting in close monitoring of the

banks.

The financial resources and credit risk management of Clearing Corporation of India

Limited (CCIL) needs to be undertaken for the purpose of uncollateralized intraday

exposure to its designated settlement banks.

CONCLUSION

Even though India is in the phase of experiencing a political stability with the formation of new

government, there is always a hope of moving ahead with better implementation of new reforms

and policies. If new policies are implemented than continuous evaluation should be made which

helps in reducing the external risks. Therefore the slogan ACHE DIN ANEWALA HEwill

surely be come. But now it is a challenging task for the new government to come out with

stringent actions for the policies to be implemented.

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