The Reserve Bank of India has stressed the importance of technological innovation as a vital part of liquidity management system in banks.
The RBI, in its annual report, highlighted the incidence of technology risk translating into a liquidity risk, resulting in chaos in the banking sector.
This assumes significance against the back drop of the run on ICICI Bank in April 2003 when cash in the bank's automated teller machines dried up.
In tackling the run, triggered by rumours in Gujarat, ICICI Bank emphasised on the logistics of carrying money out and replenishing the ATMs.
In its role as the lender of the last resort, the central bank has realised the need to distinguish between solvency and liquidity problems.
"While the central bank's role in providing liquidity support instills confidence to the financial system, the actual action requires the central bank to distinguish between solvency and liquidity problems," the RBI report stated.
One key prerequisite to avoid crises would be regular availability of comprehensive information.
As the government talks of decreasing its holding in the banking sector to 33 per cent, the RBI annual report highlighted how lack of sovereign ownership of certain institutions could make them vulnerable to shocks.
Once again making an indirect reference to the ICICI Bank incident, the central bank said in a deregulated financial system with progressive diversification of bank ownership, shocks tend to get transmitted more rapidly across institutions, especially those that do not have the backing of sovereign ownership.
For instance, even as Indian Bank incurred a heavy loss, it was able to absorb the shock since it had government backing.
The central bank has cautioned banks to increase their intrinsic strengths and its annual report stated that a crisis can adversely affect even strong institutions.
Weaker and more fragile institutions are even more vulnerable. Smaller banks cannot take shocks and they may not have sufficient risk management procedures in place.
The recent experiences in both the domestic and international markets indicate that the role of central banks as lenders of the last resort calls for the bank to be more proactive.
More from rediff