“The financial system needs to adapt to an environment of slower growth and is likely to see deteriorating asset quality,” the mission prescribed.
According to the mission, appointing a new governor that can provide strong and stable leadership for the country's central bank is mandatory to tackle all the issues in the days ahead.
It also pointed out that accommodative monetary policy; weak supervision and proliferation of financial institutions over the past years have led to rapid rising prices of assets and over extension of banks.
Lower reserves have been the main factor behind the squeeze in banks' liquidity, which has exposed existing vulnerabilities in the financial sector, according to the mission. It is also of the view that though reserves have stabilised in recent weeks, the situation remains fragile.
High remittance has resulted in rising forex reserves despite lackluster export performances, but the slowdown in the remittance inflow and rising imports have hit the forex reserve significantly in recent months, the mission pointed out.
The mission, however, welcomed the central bank’s recent directives on credit-to-deposit ratios, loan to value ratios, curb on real estate exposure and re-introduction of Statutory Liquidity Ratio (SLR).
It has projected that the current account deficit to about two percent of GDP due to slowdown in remittance inflow and exports contraction. “Revenue collection has been impressive in the past few years but expenditure should be oriented more towards investment that requires enhancing implementation capacity,” it suggested.
The mission has urged the government to refrain from issuing new licenses of commercial banks for the time being.
It has also asked the government to pass the revised Banking and Financial Institutions Act (BAFIA), encourage bank consolidation, and proceed with the restructuring of state controlled banks.
The mission has said that interest rates need to be maintained above those prevailing in India and the central bank's liquidity management needs to be strengthened. Tackling structural problems remains essential to achieve high growth over medium term, according to the mission.