Chief Business Reporter
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| Prasad Ananthakrishnan |
IMF mission chief (Qatar) Prasad Ananthakrishnan said in a bank-dominated system all the risks would go into the banking system.
“So a bond market is very important to diversify risks in these countries,” Prasad told Gulf Times on the sidelines of the 10th GCC Banking Conference in Doha yesterday.
Prasad said creating a bond market was a long process. “A few bond issues coming now and then do not make a bond market. There is a process involved; an infrastructure needs to be created. There is a primary market… a secondary market…some market makers will have to come into the picture,” Prasad said.
He said there needs to be a calendar for issuance of government bonds. And there must be a legal, regulatory framework in place for the bond market. Gulf countries have started developing their bond markets and they are at different stages of development, he added.
Prasad also stressed the need for “good statistics” in the banking system.
“With good statistics you can first look into the risks… and then get into risk assessments. But all these cannot happen if banks themselves do not do due diligence and risk assessment,” Prasad said.
He said the global financial crisis had left its mark on the GCC region. Buoyant economic activity, rising consumer and investment confidence, liquidity, have all spurred excessive credit growth before the crisis. Same was the case with inflation and asset prices. The GCC countries’ reserves had increased between 2003 and 2008.
But because of some prudential policies that these countries were following, they were in a position of strength at the beginning of the crisis.
“So it had both sides. While it created excessive credit, yet at the same time, they were in a position of strength because of the financial power they had. So, when the crisis came, they were able to follow counter-cyclical, macro-economical or fiscal policies. They were also able to have strong financial policies in terms of liquidity, asset purchase and capitalisation. So they mitigated the impact of the crisis,” Prasad said.
He said IMF study shows economic growth has an impact on the non-performing loans (NPLs) of banks.
“So, banks have to be careful. During good times, if one starts lending too much, the money one lends can turn into NPLs during an economic downturn. There is evidence for this in the GCC region,” Prasad said.
In future, Prasad said, the GCC and other countries have to follow ‘good, comprehensive’ regulation that covers systemically important institutions as well. “One should align to international regulation based on national practices,” Prasad added.