Transcript Financial Crises & Impact on Indian Banks

Danger
Opportunity
Danger
Indian Banking System
Status of integration with global Banking system
 A few India Banks have presence overseas
 Stringent RBI restriction on opening office overseas
 Indian Banks overseas mainly provide trade finance with host
country
 Collective external commercial borrowing of all Indian Banks
miniscule as % of GDP. Iceland went too far
Opportunity
Danger
Indian Banking System
Status of integration with global Banking system
 Foreign Banks presence in India
 License restricted to a few branches per year
 Foreign banks active mainly in capital flows to Indian Banks /
Corporate sector
 Also have retail presence
 Indian and Foreign Banks have mutual correspondent relationship to
promote trade finance & FX business
Opportunity
Danger
Indian Financial System - Strengths
 Investments financed primarily through local savings
 Prudential policies have attempted to prevent excessive recourse to
foreign borrowings
 GoI fiscal deficit though high but financed from Internal Savings
 Current Account deficit restricted to 1-2% of GDP since 1990
 Indian approach is gradual, focused and calibrated opening of
financial sector, taking into cognizance reforms in the other sectors
of the economy.
Opportunity
Danger
Indian Financial System - Strengths
 Financial markets contributing to efficient channeling of domestic
savings into productive uses and are supporting domestic growth.
Summary
India's external and financial sector management coupled with
ample forex reserves coverage and the growing underlying strength
of the Indian economy reduce the susceptibility of the Indian
economy to global turbulence.
Opportunity
Danger
Financial Crises
Possible downside impacts
 Potential reversal of capital flows
 Liquidity crises
 Treasury Losses from derivatives
 Capital erosion due to losses
 Erosion in shareholders wealth
 Risk management
 Brand erosion
 Job losses
The macro effects have so far been muted due to
 Overall strength of domestic demand
 Healthy balance sheets of the Indian corporate sector
 Predominant domestic financing of investment.
Opportunity
Danger
Indian Baking System
Regulation saved the day
 Indian banks are properly captalized and well regulated in
comparison to US banks
 Banks are subject to prudential regulations in regard to capital and
liquidity
 Banks borrowing restricted in Interbank Market; linked to networth
 Strict ALM prescribed by RBI. Northern Rock type situation not
possible in India
 ECB severely restricted by RBI; prior permission required
Opportunity
Danger
Indian Baking System
Regulation saved the day
 Derivative instruments permitted as Risk Management Product
rather than trading products
 Complex synthetic derivative not permitted; will be introduced as &
when effective Risk Management set up in place
 Restriction of exposure to high volatile sectors like Real Estate,
Stock Market etc
 Tight regulation for NBFCs on prudential exposure norms, thereby
eliminating systemic risks
Opportunity
Danger
Indian Baking System
Impacts of Financial Crises
 Export / Import down >20% leading to fall in Trade Finance
Business
 Fresh External Commercial Borrowing of Banks impacted due to rise
in
SWAP rates
 Few Indian banks had invested in the collateralised debt obligations
(CDOs) / bonds which had a few underlying entities with sub-prime
exposures
Opportunity
Danger
Indian Baking System
Impacts of Financial Crises
 Few banks did suffer on account of the mark-to-market losses
caused by the widening of the credit spreads arising from the
sub-prime episode on term liquidity in the market, even though the
overnight markets remained stable.
 Few Banks had exposure on failed entities like Lehman Brothers
Opportunity
Danger
Thank You
Opportunity
Danger
BACK
Opportunity