Indian banks shone during financial crisis

During the global credit crisis, Indian lenders played an important role in keeping the economy moving, and their success continues.

Two years ago, when the financial crisis on Wall Street reached its peak, economists in India were surprisingly buoyant about its ripple effects in their region. Many contended that emerging high-growth economies such as India's had "decoupled" from developed markets.
But India was not spared the shocks of recession. The country's volatile stock market lost nearly half its value in 2008 as stampeding foreign investors pulled nearly US$5 billion (Dh18.36bn) out of the money markets.
Analysts revised economic projections, presaging weaker GDP growth and large-scale retrenchments.
Amid rumours of a liquidity crisis plaguing financial institutions, depositors at one private bank, ICICI, made frenzied withdrawals, with some emptying their accounts. The exodus of depositors ceased only when the bank issued a public statement assuring customers of its financial health.
While many debunked the contentious decoupling theory, its proponents were largely proved right - at least in the context of India's robust banking sector.
At a time when many banks in the US and Europe went bankrupt, Indian lenders remained largely insulated from the global crisis. While their western counterparts tightened their monetary policy, India's banks were lending, functioning as a significant driver of GDP growth and employment, analysts say.
Before the start of the financial crisis, analysts often said that because of heavy government regulation, India's banking system was restricting economic growth. But the cautious and calibrated approach of India's policymakers was vindicated during the crisis.
"The banks in India not just survived the crisis, but also grew at an excellent rate," Palaniappan Chidambaram, the finance minister at the time, said this month.
A new report from the management consultancy McKinsey says that by 2015 India is expected to nearly double its share of global banking revenue to 2.8 per cent, from 1.5 per cent last year.
Duvvuri Subbarao, the governor of the Reserve bank of India (RBI), said this month that in this fiscal year Indian banks were likely to post higher returns on assets and equity than banks of most other leading Asian economies.
Twenty Indian banks with a total brand value of $13bn were listed on this year's Global Banking 500, an annual international ranking of the world's most valuable bank brands by the UK consultancy Brand Finance.
The government-owned State Bank of India (SBI), the country's largest bank - whose brand value increased from $1.5bn last year to $4.6bn this year - was ranked 36, and became the first Indian bank to be ranked among the world's top 50 banks.
ICICI, India's largest private-sector bank, was in the top 100, with a brand value of $2.2bn.
Bank credit in the fiscal year that ended last March 31 grew by 16.7 per cent, mainly to meet the credit requirement of a rapidly growing economy.
To accelerate growth, the government last week decided to enhance the lending capacity of banks by injecting $1.33bn into the capital market, this in addition to the $3.32bn approved in the 2010-2011 budget. This amount will be infused via nationalised banks that hold the biggest share - 52 per cent - of the total bank credit market.
Banks have lately come under pressure from the RBI to increase deposit rates and cut lending rates.
Last week, the SBI, which holds 23 per cent of the bank credit market, raised rates on deposits ranging from 15 days to 10 years by 50 to 150 basis points. ICICI also raised its fixed-deposit rates this month by 25 to 50 basis points.
"To achieve our collective aspiration of double-digit and inclusive growth, we need to raise the level of national savings and channel those savings into investment," Mr Subbarao said this month.
But the aggressive lending has its pitfalls, the RBI warns. Bad loans, known in banking parlance as non-performance assets (NPAs), are increasing because of unsecured lending. The gross bad loans of commercial banks rose to 847.47bn rupees (Dh69.17bn) in the fiscal year that ended on March 31, from 638.28bn rupees a year earlier.
"Management of NPAs by banks remains an area of concern, particularly due to the likelihood of deterioration in the quality of structured advances," said an internal report on banking released recently by the RBI. "Asset quality can get compromised during periods of high credit growth and this can result in the creation of non-performing assets for banks in the later years."
But there is ample scope for growth in the banking sector, as banks tap newer market segments. India's banking penetration is currently much lower than most developed markets.
With only 10.11 bank branches per 1,000 adults, only 40 per cent of India's 1.2 billion people have bank accounts, according to McKinsey. Of India's 600,000 villages, only 30,000 have access to bank branches.
The market research company India Brand Equity Foundation says the country's working population will increase from 675.9 million to 795.5 million by 2026, expanding the market for banks.
Over the next five years, India is expected to spend $250bn on social schemes and subsidies such as old-age pension programmes. The brokerage CLSA Asia-Pacific Markets estimates that $100bn of that amount will be lost to corruption.
Research by McKinsey suggests that India can save as much as 1 trillion rupees a year, nearly one fifth of its current fiscal deficit, by depositing payments directly into bank accounts.
Considering the soaring need for deeper banking penetration, Mr Subbarao said, the RBI would finalise guidelines on new banking licences by the end of this month. Several corporations, including the Tata group and Reliance, have expressed interest in setting up private banks.
The existing banks, for their part, are increasingly employing agents to provide banking services in areas where there are no branches. Equipped with handheld electronic swipe devices that record personal contact information and biometric or identity details, the agents can conduct customers' banking transactions.
A World Bank study shows that a similarly constructed cash transfer scheme in Brazil helped lift 20 million people out of poverty between 2003 and last year.
Last month, the RBI allowed private companies and individuals, mainly retired government employees, to become designated bank agents. The RBI is pushing commercial banks to adopt this technology and embrace financial inclusion as an "opportunity rather than an obligation".
 
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