INDIAN INSTITUTE OF MANAGEMENT
Impact of Global Economic Situation on the Indian Banking Industry
17 Jan, 2009
TABLE OF CONTENTS
THE INDIAN BANKING INDUSTRY 2
The structure 2
A snapshot of 2006-07 3
RBI’s MONETARY POLICY 4
Changes in the monetary policy 4
Impact on the banking industry 5
FOREIGN CAPITAL FLOW TRENDS 5
ASSET QUALITY PRESSURES 6
Small and Medium Enterprises (SMEs) 6
Export oriented sectors 7
Real Estate 7
Retail Credit 7
Mortgage loans 7
Vehicle loans 8
Unsecured loans 8
LONG TERM GROWTH ...view middle of the document...
The major reason behind this was the slowdown in the US economy caused by the sub-prime crisis which started in 2007. This slowdown was further exacerbated by the seemingly endless rise in oil and food prices (Exhibit 1), which led to high levels of inflation. Owing to these twin issues, the US housing industry, banking industry, automobile industry and a host of other industries were hit badly and pulled the world economy down along with it.
The silver lining is that developing countries like India have been affected to a lesser degree as compared to the developed world and have continued to experience growth in GDP. However in today’s global economy, there is a strong interplay between the various economies and accordingly, India has not been able to remain completely insulated from these shocks. The banking industry was one of the first to experience the tremors.
THE INDIAN BANKING INDUSTRY
In this section, we discuss the structure of the Indian banking industry and the direction in which it was headed before the economic crisis.
Commercial banks in India can be classified as public sector banks, private sector banks and foreign banks. As per the credit rating agency ICRA, public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively (Exhibit 2). The total asset base of commercial banks in India was Rs.2,787,891 crores as of March 2006. (Report on Trend and Progress of Banking in India, 2006, pg 63.)
The Indian banking industry is fairly mature in terms of product range and reach. The regulatory body, the Reserve Bank of India, faces minimal pressure from the government. Globalization, financial deregulation and technological advancements have all resulted in significant benefits for the Indian economy in general and the banking industry in particular.
A snapshot of 2006-07
Following four consecutive years of economic growth, the Indian economy was looking strong in the year 2006-07. Banks across the board experienced growth driven mainly by retail banking, mortgages and investment services. Also, an increasing number or millionaires in the industry resulted in increasing scope of Wealth Management Services. Hence the banks experienced a surge in fee incomes.
Industrial production, infrastructure industry, services sector and export-based industries were all strong and so demand for credit was also increasing at a fast pace. Banks could sustain this credit growth because bank deposits were also rising owing to increasing disposable incomes of the population. In spite of the increase in credit given by the banks, the Non Performing Assets (NPAs), remained low. NPAs reflect the number of loans that are delinquent and are hence written off the books of accounts by the banks, resulting in a loss on the transaction.
Low levels of NPAs increased the confidence of the banks and therefore they started aggressively...