India Commercial Banking Industry in The Global Financial Crisis

India Commercial Banking Industry  in The Global Financial Crisis- Dissertation Writing Help

This report was written in late January 2009, at which two key trends were underway. One was a renewed weakening in stock markets. Unlike in October and November 2008, when stock market participants were focusing on the evaporation of trust and liquidity in the global financial system, investors instead fretted about the global economic slowdown, in particular its impact on corporate profits. In spite of spectacular headlines – including the likely GBP28bn loss, the largest ever for a UK listed company, reported by Royal Bank of Scotland – the real problem is a near-certain stream of profit warnings and poorer-than expected results from a very wide variety of non-financial companies.

The general assumption that has been made by financial market participants is that the policy responses made by governments, central banks, regulators and multi-lateral institutions are sufficient to avert a total collapse of the global financial system. In the absence of this assumption, global stock markets – and, indeed most other ‘risk’ asset classes – would have slumped during December 2008 which, as it transpired, was a month of relative tranquillity. Although the details vary from country to country, policy responses everywhere include most or all of the following: a significant reduction in official interest rates by central banks, which has often been accompanied by a statement that the cut should be passed on by commercial banks to non-bank customers; quantitative easing of monetary policy, being the increase in the central bank’s balance sheet through an aggressive expansion in its monetary liabilities; qualitative easing of monetary policy, being the broadening of the assets that the central bank is prepared to hold – or accept as security – to embrace lower-rated and/or illiquid securities; aggressive easing in fiscal policy

(with the result that most EU member states, for instance, are now expected to run budget deficits that are far in excess of the maximum – 3% of GDP – prescribed in the Maastricht Treaty, while the Obama Administration in the US is contemplating a massive stimulus); issuing of government guarantees for bank deposits, and participation in bilateral agreements for swaps and/or stand-by credit facilities. In essence, there has been a shift in risk. Prior to September/October 2008, most of the risks in the international banking system were borne by shareholders, holders of bonds and subordinated debt issued by banks, protagonists in the inter-bank funding markets and, perhaps, depositors. Now, thanks to the issuance of bank guarantees, qualitative easing by central banks and, in some instances, nationalisation of commercial banks, most of the risks are borne by holders of government bonds. In theory, the bond holders run little risk of not being repaid capital and interest if the country in question is running an

independent monetary policy. In extreme cases, the US Federal Reserve or the Bank of England, for instance, can create money in order to repay or roll-over Treasury bonds or Gilts; in this instance, the bond holders do run a risk of capital losses in the event that inflationary expectations change or the real interest rate that is demanded of the government in question rises. However, the situation is different for a country not running an independent monetary policy. An EU member state that is in the eurozone does not have the automatic ability to call on the European Central Bank (ECB) to bail out the government.

Strengths And Weaknesses Of Different Regions

At this stage, we hold to our views of the relative strengths and weaknesses of the different regions of the world which we expounded three months ago. In theory, most of the oil rich countries in the Middle East, together with most of the Asia Pacific economies, should suffer less than the countries of Latin America. In most of the Middle East (and North Africa) and Asia-Pacific countries (the major exception being South Korea), the banks are net lenders to the global banking system, or can be supported by large pools of (usually) official organised savings. The large commercial banks in the Asia-Pacific have been recapitalised and restructured since the financial crises that swept through East and South East Asia a decade ago. Furthermore, most of the Middle Eastern and Asia-Pacific countries have the advantage of entering the global financial crisis at a time when they are running current account surpluses. The large country that is running a substantial current account deficit is Australia. However, Australia’s banks – unlike their counterparts in the UK and the US – have relatively little exposure to illiquid mortgage backed securities. Moreover, the government is running a budget surplus and is virtually debt free. Aside from this, the roughly US$1,000bn in organised savings outside the banking system gives policy-makers additional options. Australia’s external sector has also already received a substantial boost from the 25- 30% fall in the Australian dollar over the last three months or so.

By and large, the Latin American countries face two problems. One is the general risk aversion on the part of investors generally, which has already been reflected in slumping stock markets and currencies. The other is that, to differing extents, they are exposed to the slow-down in the US. Investor perceptions will, in these difficult times, tend to favour countries that have been pursuing orthodox economic policies – such as Mexico, Brazil, Chile and Colombia – over those that have not – Venezuela, Argentina, Ecuador and Bolivia, for instance. So far, the Latin American countries have been largely unaffected by the global financial crisis. The combination of commodity prices that are falling, temporarily at least, and in some cases the need to roll over large quantities of government borrowings could present some interesting challenges. Nevertheless, the countries that appear to be at the greatest risk are also the countries where the banking systems have already shrunk as a result of past problems. The potential for future damage is, therefore, limited.

In the current crisis, it may be most helpful to compare the situations of South Africa and Nigeria with those of particular Latin American countries. In South Africa, a well-regulated banking system, in an economy that is a diversified exporter of natural resources, should be able to withstand the latest fluctuations in global financial markets. South Africa, like Brazil and Australia, should also benefit from the slippage in its currency over the last three months. Nigeria, in contrast, is a country where aggressive bank lending has accompanied an oil boom which now appears to be going into reverse. Although the Central Bank of Nigeria has strengthened the banking system by increasing the minimum amounts of capital required, it is likely that some of the commercial banks in that country are underestimating their bad loans. On balance, we would suggest Nigeria’s position is in some ways similar to that of Venezuela.

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