Rakesh Mohan 2006 Speech on Avian Influenza Pandemic: Remains relevant to fighting the crisis today

Came across this 2006 speech by Rakesh Mohan, who was then Deputy Governor at RBI.

He outlined what to expect in case there is an outbreak of large scale pandemic :

I would like to welcome all of you to India for the IMF Seminar on “Preparedness within the Financial Sector for an Avian Influenza Pandemic”, which has been a source of concern not only for health experts but also for policy makers in Governments and Central Banks alike. It is important to undertake activities that are preventive in nature, so that the probability of an undesirable event is minimised. The Fund’s efforts to bring countries that are vulnerable to the pandemic on a common platform by organising such seminars are highly commendable. It is worth noting that if some thing does not happen, people generally remain unaware about how much effort went into making sure that it does not happen. As I understand, the focus of these IMF seminars is on business continuity planning for a human influenza pandemic and issues relevant to central banks, supervisory agencies and regulated financial institutions.

At this stage, the avian flu is not a current problem for India. However, it always has the potential of becoming a severe pandemic, however small the probability may be, in case preventive measures are not taken in time. It is, therefore, important to raise awareness among the concerned authorities. It is toward this end that the IMF is sensitising different countries towards preparing for any potential outbreak of avian flu.

At the outset, let me make emphasize that, as I understand it, the major part of the subject matter discussed in this seminar is not specific to avian flu but it could apply to all types of major disruptions in the conduct of normal business. The important point to note is that though we may believe that the possibility of occurrence of a widespread avian flu pandemic is low, the issues that are discussed in such seminars are still useful from the point of view of preparedness for any unforeseen eventualities that have the potential of disrupting the normal functioning of the financial system. Such disruptions require immediate interventions from the Government and the regulatory authorities. Thus, the scope of business continuity plans that the central banks and other institutions develop go beyond the avian flu. Preparedness with effective business continuity plans is desirable not only for dealing with the issue of avian flu but would also be helpful in case of other contingencies of any nature.

In these introductory remarks, I will try to be brief since the programme has a panel of experts dwelling on several aspects of avian flu. I, therefore, thought that the best thing that I can do today is to provide a brief overview on the issue mainly from the perspective of the financial system. While highlighting the gravity of the avian flu pandemic and challenges for the financial system, I would also dwell briefly on our preparedness for the avian flu epidemic.

He mentioned pandemic’s risks to financial system all of which have come true now:

Though the possible impact of avian flu would be covered in detail in this seminar, I would like to briefly touch upon the risks and challenges which a severe pandemic could pose to a domestic as well as the global financial system. Some of these challenges are expected to be similar to the strains on the financial system that might be expected from any slowdown in growth irrespective of the source. Others will be particular to the conditions of a flu pandemic, such as uncertain labour supply, increased operational risks, potentially unstable infrastructure and restrictions on travel, etc. International attention has focused on the need for all countries to be better prepared, in order to reduce the potential death, illness, social and economic consequences of a pandemic. A worrisome scenario cannot be ruled out if absenteeism and increased uncertainty about operational risks harm the functioning of financial markets or financial institutions. Broadly speaking, financial system effects might be on account of reduced capacity of markets and institutions due to absenteeism.

These challenges have necessitated preparedness within the financial sector so as to minimise the adversities associated with a potential pandemic, the severity of which is still uncertain. A severe pandemic will not only put substantial pressure on the fiscal balance of Governments, due to increased spending on health, public safety, social welfare, and subsidies to businesses and lost revenues, but it will also pose challenges for the monetary authorities. For financing the increased need for social spending, financial markets are expected to be thin at best and recourse to central bank borrowing may be inevitable for most of countries.

It would be prudent to assume that a severe pandemic may lead to a surge in demand for liquidity and low risk assets. Such risk aversion on the part of economic agents would lead to at least temporary declines in asset prices and widening of credit spreads, for both corporations and emerging markets. Although these effects are likely to be temporary, asset price declines could put the balance sheets of some financial institutions under stress and they may face challenges in meeting regulatory norms. Banking stability may not be an issue of immediate concern because deterioration in asset quality is not expected to appear quickly and we can perceive them as second order impact. According to the IMF, a severe pandemic may also lead to a significant but temporary reduction in net capital flows to emerging markets. Such a pandemic can disrupt market operations as well in the case of a breakdown in the trading infrastructure. In short, we can contemplate the likely challenges for central banks in the context of (i) financing the larger borrowing needs of the respective governments, (ii) inflation, (iii) liquidity management, (iv) payment and settlement systems, etc. keeping in mind that disruptions in one jurisdiction could have spill-over effect in other jurisdictions.

If required, central banks may have to prepare themselves to act as lenders of last resort. In many countries, in order to restore macroeconomic stability and fiscal sustainability, central banks may have to adjust monetary policy to prevent a sustained increase in inflation, withdrawing fiscal stimulus, particularly in countries facing debt sustainability issues, as well as ensuring external viability, including through a rebuilding of international reserves and greater exchange rate flexibility. Similarly, a financial institution’s risk assessment and management plans may have to be expanded to cover the possibility of widespread economic disruptions and their impact on loan and other asset performance.

It requires coordination between fiscal and monetary policy to fight pandemics. RBI took measures in 2006 to fight avian flu which are similar to measures today:

As part of measures to protect domestic poultry industry from any loss on account of avian flu, in April 2006, the Reserve Bank announced guidelines for relief measures by commercial banks and urban commercial banks. Keeping in view the loss of income that occurred due to culling of birds as well as steep fall in the demand for poultry products and their prices on account of outbreak of Avian Influenza (bird flu) in some areas of the country, the Reserve Bank has asked banks to consider extending certain facilities to poultry units financed by them.

Some of these measures are: (i) conversion of principal and interest due on working capital loans, which have fallen due for payment on/ after the onset of bird flu, i.e., February 1, 2006 and remaining unpaid, into term loans. The converted loans may be recovered in installments based on projected future inflows over a period up to three years with an initial moratorium of up to one year, (ii) rescheduling of remaining portion of term loan with a moratorium period up to one year depending upon the cash flow generating capacity of the unit, (iii)eligibility of borrowers for fresh need based finance, and (iv) extension of relief measures to all accounts of poultry industry, which were classified as standard accounts as on March 31, 2006. 

In addition, the Government has granted a one-time interest subvention of 4 per cent per annum on the outstanding principal amount as on March 31, 2006 (not including any part of the principal amount that has become overdue) to all poultry units availing loans from banks. To resolve any policy differences among the regulators and to discuss issues relating to any overlaps, co-ordination and co-operation, a High Level Coordination Committee on Financial and Capital Markets (HLCCFCM) consisting of Governor of the Reserve Bank, Chairman, SEBI and Chairman, IRDA along with the Secretary, Department of Economic Affairs, Government of India, is already in place. The Reserve Bank of India has also constituted an Inter-Departmental Committee to look into the details of the impact of avian flu on the financial sector of the economy.

Nice bit…

One Response to “Rakesh Mohan 2006 Speech on Avian Influenza Pandemic: Remains relevant to fighting the crisis today”

  1. Anantha Nageswaran Says:

    A very important blog post you have done, Amol, with this one. Thank you.

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