Global Financial Meltdown and Indian Banking Sector: Sri - Pradeep Kumar.B, Sri - Suresh.M.V

International Journal of Humanities and Social Science Invention

ISSN (Online): 2319 7722, ISSN (Print): 2319 7714

www.ijhssi.org Volume 2 Issue 7 July2013 PP.62-66
Global Financial Meltdown and Indian Banking Sector

Sri.Pradeep Kumar.B1 , Sri.Suresh.M.V2
1
Assistant Professor, P.G.Department of Economics, Panambilly Memorial Government College,

Chalakudy, Kerala.
2
Assistant Professor, P.G.Department of Economics, N.S.S. Hindu College, Changanacherry, Kerala.
ABSTRACT: The recent euphoria among the financial heads of major crisis affected countries primarily the
USA seems to have sent the message that the global economic slowdown triggered by the sub-prime crisis
leading to the collapse of banking giants in USA in 2008 has ceased to exist and many economies have come
back to their normal growth path. India, despite having danced to the tune of the international financial
advisers in opening up its doors to the external trade, appears to have eluded the waves of the financial crisis
thanks to the strong regulatory institututional mechanism, which functions under the unparallel stewardship and
acumen of the Reserve Bank of India. How has India managed to withstand the bad effects of meltdown is a
matter to be fathomed. The banking sector, indispensable part of the financial system of any country, in India, is
reported to have remained unshackled in the testing times of crisis. This paper aims at providing an analysis of
the performance of Indian banks in the recession period. Apart from this core purpose for which the paper is
designed, it also looks into the channels through which the crisis transmitted into Indian economy and the
monetary responses that the Reserve Bank of India embarked on to douse the flames of financial meltdown from
swallowing the Indian financial institutions and the economy. The paper is structured as follows: First section
elaborates on the transmission channels of global crisis into the Indian economy, second section reviews the
swift monetary tools that were pressed into action by the Reserve Bank of India and the third section makes an
analysis of the performance of the three groups of banks in India viz. Public Sector Banks (PSBs), Private
Sector Banks (Pvt.Bs) and the Foreign Banks (FBs) during the period of slowdown..
I. TRANSMISSION CHANNELS OF CRISIS

It is well known that western capitalist economies like US and UK, and conglomerate capitalist group,
the European Union, and the oil rich Middle East have been the epicenters of the global financial crisis. The
greed of quick money and the intensifying compartmentalization of the real economy from the money economy
surfaced in the form of an unprecedented crisis since the Great Depression of 1930s. One factor, which
distinguishes the current crisis from the crisis of 1930s, is that the current crisis became rampant in the sense
that countries contributing nothing to the germination of the crisis have had to shoulder the ill effects of the
crisis. India is not an exception to that as it has been subject to the spill over effects of crisis because of its
openness to the external world especially to the USA. We break the channels into three (Fig: 1): The Finance
Channel, The Real Economy Channel, and The Confidence Channel.
1.
The Finance Channel: The global credit squeeze unleashed an array of direct and indirect repercussions on
the financial sector of our economy. The drying up of global credit markets put pressure on the Indian
Companies to seek more credit from the domestic market, bringing domestic financial markets under
pressure. The equity market, forex market, money markets and credit market had been badly afflicted by
this credit squeeze at the global level. The frantic tendency of Indian corporate to withdraw funds from the
Mutual Funds to compensate the fall in overseas funds put Mutual Funds under heavy pressure. In the forex
market the value of Indian rupee plummeted to a post-reform historic low level (Figure No: 1). Three
factors largely contributed to this fall in the value of rupee: (1) tremendous net capital outflow especially
the portfolio investment due to frantic selling of shares by the Foreign Institutional Investors (see the figure
no.2). (2) Due to the corporate behavior of converting
www.ijhssi.org
62 | P a g e
Global Financial Meltdown and
Figure No: 1
Figure No: 2
Locally raised funds into foreign currency to meet their foreign financial obligations. The fall that the
stock markets of India underwent consequent upon global meltdown is an eye-opener to the extend of the
external exposure of Indian stock markets. (Figure No: 3). The stock markets fell around 60 percent from their
peak levels in January 2008. The sharp fall in stock market indices was also on account of the withdrawal of
Foreign Institutional Investment, which held around 35% ($ 71 billion) of Indian stocks that time. A significant
distinction must be noted here in respect of the crashing of stock markets in India v/s foreign markets. In the US,
for instance, the stock market crashed because the real economy of the US was shocked. Nevertheless, in India,
the crash in stock market had nothing to do with the real economy, as ours was the second fastest growing
economy when the world was groping under the severe recessionary trend.
Figure No: 3
www.ijhssi.org
63 | P a g e

2. The Real Economy Channel: Slackening exports from India and the widening of Current Account Deficit
(CAD) was the direct straight forwards real economy channel through which the global crisis had entered
into the Indian economy. it should be understood that three quarters of Indias trade are with the US, and
EU and the Middle East which were severely hit by the crisis. That gravity of the sluggish growth in exports
during the recession could be gauged from that fact that during 2008-09 exports from India grew at a rate of
just 3.6 percent in US $ terms as against 28.9 percent in the year 2007-08. (Figure No: 4). Indias CAD in
US $ terms was constituted just 1.5 percent of her GDP in 2007-08, which went up to 2.6 percent in 200809. (Figure No.5). The steep upward trend in CAD was driven by weak exports growth and imports growth
outpacing the growth of exports during this period.
3. The Confidence Channel: The Lehman Failure in September 2008 created a panic situation and rumors
were spread some Indian banks had financial dealings with this bank. This increased the risk aversion
tendency of the Indian financial institutions and naturally, they became more cautious about lending on a
large scale, creating liquidity problem. This naturally led to the exclusion of people from the banking
network. Here it should be mentioned that banks response to financial crisis is step towards sever financial
exclusion. The loss of confidence on the part of the banks can be gauged from the sharp deceleration in
credit growth from 22.3 percent IN 2007-08 to 17.3 percent in 2008-09. (Figure No: 6)
II. MONETARY POLICY RESPONSES TO THE CRISIS

Faced with the crisis of drying liquidity, any government resorts to monetary policy solutions as these
are proved easy to be pressed into action compared to the fiscal policy instruments on account of the short lag
effect that the former enjoys. The conventional monetary instruments like the CRR and the SLR were slashed
largely to release sufficient liquidity to the credit market. The slash in CRR flooded the credit market with
approximately Rs.1, 60,000 crore in mid September. Further, reduction in SLR to the tune around 1.5 percent of
total demand and time liabilities resulted in a additional liquidity support of Rs.60, 000 crore. A decision was
taken to hike the interest on foreign currency deposits to address the problem of the depletion of foreign
exchange reserve. Rules regarding the external commercial borrowing by Indian companies were liberalized to
pave the way for large foreign exchange inflows. Apart from this, the government and the Central Bank together
took a decision to buy back the securities issued as a part of the market stabilization programme to inject
liquidity into the credit market.
www.ijhssi.org
64 | P a g e

III. HAS INDIAN BANKING SECTOR WITHSTOOD THE FINANCIAL MELTDOWN?
Largely, there has been consensus among the banking experts and economists that the Indian banking
sector as a whole has been completely insulated from shackles of the financial meltdown. This paper as outlined
at the outset enquires into this question. For this purpose, the study has chosen three segments of banks in India
viz. the Public Sector Banks, Private Sector Banks and the Foreign Banks. The yardsticks for the evaluation are
Gross Profit/Loss as percentage of Total Assets, Interest Income as Percentage of Total Assets, Gross Non
Performing Assets as a percentage of Total Assets and the Return on Asset Ratio. We do accept that these
yardsticks are neither sufficient nor perfect in arriving at a conclusion regarding the performance of banks.
Nevertheless, they are relevant as they give first hand information on the healthiness of the banking system.
IV. GROSS PROFIT/LOSS AS A PERCENTAGE OF TOTAL ASSETS
A look at the figure No. 7 and table No.1 reveals that for both public and private sector banks Gross
Profit/Loss as Percentage of Total Assets increased from 1.7 and 2 in 2007-08 to 1.8 and 2.4 in 2008-09
respectively. As far as the foreign banks are concerned, the ratio went up from 3.9 in 2007-08 to 4.5 in 2008-09.
Although this appears to be marginal improvement, in the light of the backlash of the crisis, this improvement
ought to be regarded as a testimony to the fact that Indian banking sector remained unshackled during the time
of the crisis.
V. INTEREST INCOME AS PERCENT OF TOTAL ASSET s

Earnings on interest form an important source of income to the banks. Table and figure presented
below clearly shows the trend in interest income as percentage of total assets of three groups of banks under our
study. The private sector banks have fared better in respect of these criteria. Their interest income as percent of
total assets stood at 7.6 in 2007-08, which shot up to 8.3 at the zenith of the recession, which is in 2008-09.
Other two groups of banks viz. PSBs and FBs have registered marginal improvement in this respect.
VI. GROSS NON-PERFORMING ASSETS AS PERCENT OF TOTAL ASSET s

It is an indispensable tool by which the healthiness of a bank can easily be gauged. Non-performing
assets normally relies on two things: banks inability to monitor the non-performing assets; two, general
downward trend in the economy, resulting in the loss of job, making the people unable to repay the loan.
Unsurprisingly, under recessionary conditions, an increase in non-performing assets is a common thing.
Nevertheless, in the case of PSBs in India the gross non-performing asset as percent of Total assets has declined
www.ijhssi.org
65 | P a g e

although marginally from 1.3 percent in 2007-08 to 1.2 percent in 2008-09. (Table No.3 and Figure No. 9)
whereas in the case of both Pvt.Bs and FBs, the non-performing assets have increased marginally.
VII. RETURN ON ASSETS

Perhaps, one would find this yardstick as best in the sense that it gives a birds eye view of all that
happen to be relevant to judge the performance of a banking institution. Going by the available information on
this, we find an interesting that private sector banks in India have made a noticeable upward trend in this regard.
Their return on assets remained 1.13 percent during the turbulence years of crisis that is 2007-08 to 2008-09.
Thereafter, in 2009-10, they have shown in increase to 1.28 percent. But it quite interesting that foreign banks,
which may have been deeply exposed to the external financial institutions and its functioning, have experienced
a downward trend in their return on assets ratio to 1.26 in 2009-10 form 1.99 in 2008-09. In 2007-08, the return
on assets of FBs was 2.09. to put in a nutshell, FBs have been witnessing a continues fall in return on assets
ration since 2006-07. Public Sector Banks on the other hand have experienced a fall in return on assets ratio in
2009-10 to .97 from 1.03 in 2008-09.
Return On Assets
Return on Assets
2.5
Banks
2
PSBs
1.5
Pvt.Bs
1
Return on Assets
2005- 2006- 2007- 200806
07
08
09
200910
PSBs
0.88
0.92
1.03
0.97
Pvt.Bs
1.07
1.02
1.13
1.13
1.28
FBs
2.08
2.28
2.09
1.99
1.26
FBs
0.5
0
2005-06
2006-07
2007-08
2008-09
2009-10
Year
VIII.
CONCLUDING OBSERVATIONS
To conclude, while the crisis has had its ill effects on a handful of sectors like the IT and ITESs, germs
etc, which are dependent more on exports and foreign exchange conditions, the Indian financial sector,
particularly the banking sector remained unaffected barring some stray reports of exposure of a few banks to
external financial turbulence. The main reason, it is presumed and theoretically supported, that the crisis in India
has been an imported one and hence it has had little to do with the fundamentals of the real economy. So long
as the real sector remains compact and undeterred small blemishes that appear on the face of the financial sector
can hardly do anything. Whereas in the case of the crisis affected West, the crisis itself came through the
maladies of the real sector. The lesson that we have learned from the crisis is likely to cement the argument that
cent percent deregulation is not the apt way to be adopted in the name of reforming the financial sector. Reform
should not be reckoned with deregulation alone; it has to be in line with allowing the horse to run with the rope
in the hands of the rider.
REFERENCES
[1].
[2].
[3].
[4].
[5].
Committee on Financial Sector Reforms (2009). A Hundred Small Steps: Report of the Committee on Financial Sector
Reforms, Government of India,PlanningCommission,NewDelhi://planningcommission.gov.in/reports/genrep/rep fr/cfsr all.pdf
Prsad, A and C.Panduranga Reddy (2009):Global Financial Crisis and its impact on India, J Soc Sci, 21(1): 1 -5 (2009).
Mohan, Rakesh (2009):Global Financial Crisis-Causes, Impact, Policy Responses and Lessons, speech at the 7 th Annual India
Business Forum Conferences, London Business School, London, 23 rd April 2009.
Reserve Bank of India Bulletin (various issues).
Ghosh Jayanti, Macro Scan, (various articles)
www.ijhssi.org
66 | P a g e

Global Financial Meltdown and Indian Banking Sector: Sri - Pradeep Kumar.B, Sri - Suresh.M.V

Uploaded by

Copyright:

Available Formats

Global Financial Meltdown and Indian Banking Sector: Sri - Pradeep Kumar.B, Sri - Suresh.M.V

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Global Financial Meltdown and Indian Banking Sector: Sri - Pradeep Kumar.B, Sri - Suresh.M.V

Uploaded by

Copyright:

Available Formats

International Journal of Humanities and Social Science Invention

ISSN (Online): 2319 7722, ISSN (Print): 2319 7714

Global Financial Meltdown and Indian Banking Sector

Assistant Professor, P.G.Department of Economics, Panambilly Memorial Government College,

I. TRANSMISSION CHANNELS OF CRISIS

Global Financial Meltdown and

Global Financial Meltdown and

II. MONETARY POLICY RESPONSES TO THE CRISIS

Global Financial Meltdown and

V. INTEREST INCOME AS PERCENT OF TOTAL ASSET s

VI. GROSS NON-PERFORMING ASSETS AS PERCENT OF TOTAL ASSET s

Global Financial Meltdown and

VII. RETURN ON ASSETS

You might also like