financial crises and indian banks

8/2/2019 Financial Crises and Indian Banks

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Indian 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

Status of integration with global Banking system


3/12

Indian 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

Status of integration with global Banking system


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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.


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Indian Financial System - Strengths

Financial markets contributing to efficient channeling of domestic

savings into productive uses and are supporting domestic growth.

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.

Summary


6/12

Financial Crises

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

Possible downside impacts

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.


7/12

Indian Baking System

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

Regulation saved the day


8/12


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

Regulation saved the day


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Export / Import down >20% leading to fall in Trade Finance

Business

Fresh External Commercial Borrowing of Banks impacted due to rise

in rates

Few Indian banks had invested in the collateralised debt obligations

(CDOs) / bonds which had a few underlying entities with sub-prime

exposures

Impacts of Financial Crises

SWAP


10/12


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

Impacts of Financial Crises


11/12

Thank You


12/12

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