Risk and liquidity management assume more importance in the Indian banking system in the future due to: 1. Further globalization. 2. More consolidation and deregulation of the financial system. 3. Further diversification of the financial system. 4. More financial inclusion in the economy. Select the correct answer using the code given below:

Passage

Financial markets in India have acquired greater depth and liquidity over the years. Steady reforms since 1991 have led to growing linkages and integration of the Indian economy and its financial systems with the global economy. Weak global economic prospects and continuing uncertainties in the international financial markets have had an impact on the emerging market economies. Sovereign risk concerns, particularly in the Euro area, affected financial markets for the greater part of the year, with the contagion of Greece’s sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility.

The funding constraints in international financial markets could impact both the availability and cost of foreign funding for banks and corporates. Since the Indian financial system is bank-dominated, banks’ ability to withstand stress is critical to overall financial stability. Indian banks, however, remain robust, notwithstanding a decline in capital to risk-weighted assets ratio and a rise in non-performing asset levels in the recent past. Capital adequacy levels remain above the regulatory requirements. The financial market infrastructure continues to function without any major disruption. With further globalization, 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 skills, therefore, assume greater significance.

QUESTION

CSAT

Easy

Comprehension

Prelims 2013

Risk and liquidity management assume more importance in the Indian banking system in the future due to:

Further globalization.
More consolidation and deregulation of the financial system.
Further diversification of the financial system.
More financial inclusion in the economy.

Select the correct answer using the code given below:

Select an option to attempt

Explanation

Statement 1 is correct. The passage mentions that further globalization will make the banking business more complex and riskier, which will require enhanced risk and liquidity management. Global integration of the financial system exposes Indian banks to greater international financial volatility and interconnected risks.

Statement 2 is correct. The passage suggests that with further globalization, consolidation, and deregulation, the financial system will become more complex and risk-prone, emphasizing the need for better risk and liquidity management.

Statement 3 is correct. The passage highlights that as the financial system diversifies, it may become more complex, leading to the need for better management of risk and liquidity.

Statement 4 is incorrect. While financial inclusion is an important development, the passage does not explicitly link it to an increased need for risk and liquidity management. It focuses more on globalization, deregulation, and diversification as factors influencing the need for these measures.