Date:08/07/2005 URL: http://www.thehindubusinessline.com/2005/07/08/stories/2005070801011700.htm

Back `Banking sector must protect itself from defaults'

Our Bureau

Kolkata , July 7

THE banking sector needs to learn lessons from happenings in countries such as South Korea and take precautions against defaults, especially from the household sector, according to Prof Suresh Sundaresan, Chase Manhattan Bank Professor of Finance and Economics at the Columbia Business School, University of Columbia.

Delivering a lecture on `Consumer and Corporate Defaults: Lessons from Asia and Western Hemisphere' here, Prof Sundaresan said that, throughout the world, household sector debt has been on the rise.

Financial institutions and banks, too, had decided to take substantial exposure in the household sector. This was alright; but in the case of default, the impact would be felt all the more because, as opposed to the corporate sector which is governed by limited liability, the household sector is more prone to risks. The more leveraged the economy, the more is the potential risk of default, he said.

According to Prof Sundaresan, financial institutions must leverage upon credit disintermediation to handle funds better.

As regards corporate defaults, it would be imperative to put in place adequate bankruptcy laws, he said.

The focus of Prof Sunderesan's lecture, which was directed at finance managers in the corporate sector, was on hedging and trading strategies and risk management.