When was the last time you visited your bank to deposit funds and felt insecure about the safety of your hard earned money? Probably never. That is because we Indians were lucky enough to be banking in India when the biggest banks were shutting shop in late 2008.
The global subprime crisis did a lot of good to the Indian banking system's reputation. Known for its conservative approach and good governance, the entities lived up to their repute in difficult times. Except a few, most Indian banks barely had an impact of the subprime crisis. Other than the short term liquidity crisis, Indian financial system got away with marginal rise in NPAs and lower growth.
However, the RBI is not a regulator to bask under past glory. It wants to make sure that its repute remains intact in future as well. Accordingly it conducted a study on financial stability of Indian banks in terms of operational soundness. The comparison was also made vis a vis banks in the fast growing BRIC economies.
While Indian entities faired considerably well in terms of relative asset quality and profitability, they seem to be undercapitalized against their peers in the BRIC nations. This can be primarily attributed to the fragmented nature of Indian banking sector. Also this can be a major handicap in the growth of entities in the sector.
Bank financials across BRIC nations
Data source: RBI Financial Stability Report
The RBI is trying to address this issue by recapitalizing public sector banks where it has a majority stake. The small private enterprises are however left to fend for themselves. They must either agree to get merged with bigger banks or raise capital at expensive rates.
Thus it will be some time before Indian banks get the kind of capital cushion that their peers in Brazil and Russia enjoy. The fact that that the penetration of credit in India remains at a fraction of the developed economies adds to the growth potential. Moreover, the relative soundness of Indian banks as compared to the behemoths in China also works in their favour.
Banks in the US and Europe are being proposed for stress tests and default taxes. Their humungous bonus payouts and superficial asset growth are a matter of public scrutiny. As the lens gets closer on them, these entities may have to lose a lot of their market cap.
While the BRIC banks could be in a race to catch up with their Western peers in terms of size and market cap, they should not follow the latter's route. Indian banks in particular have to remain on their toes to keep up with their repute. The RBI rightly believes that while Indian banks are stable, they could do with consistent appraisal and oversight.