Are Indian banks 'BRIC' solid? - Views on News from Equitymaster

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Are Indian banks 'BRIC' solid?

Mar 30, 2010

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
(%) 2009CARNPAROAROE
Brazil18.0 4.5 1.2 12.0
Russia18.0 7.5 0.5 5.0
India13.0 2.5 1.0 13.1
China11.8 2.0 0.8 12.0
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.

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5 Responses to "Are Indian banks 'BRIC' solid?"

SKA

Apr 6, 2010

Thanks to the controller RBI for shaping Indian banks in such a way that they are free to do as the tops of individual banks want to do but in a given field. Not in a freestyle way. It is only RBI who has given so a sound footing to bnks. Due to the policies of RBI every country is now looking at Indian banks. Now is the time to reward bank staff for proper implementation of the policies.

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KARUNGOPAL

Apr 5, 2010

Nationalised bank employees need to be given their due? What have they been getting until now - less than their dues and rewarding the nation with their charity? Their self-assumed liberty to behave like organized bandits and to hold the customers to ransom at will, is not enough? I suggest that the nationalised bank staff pack be properly disciplined, if necessary by a few selective sackings for which the authorities must arm themselves legally, and the private banks be given more their due so that there is a check and balnce to this organized goonery from the side of nationalised bank staff and officers. The RBI will still do their job, they do not depend on the supremacy or primacy of nationalised banks to be able to organize banking in the country, and the bank consumers will be a relived lot. Developing and encouraging the private banks alone (to approximately the level of a balance between nationalised and priavate - no more, no less) will provide a check on the nationalised bank goons, or else they will hijack this area of critical national importance to their own personal benefits.

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Abhay

Apr 4, 2010

I wonder if we will see the PSBs being merged to form larger more efficient banks anytime soon; if we are to compete with the mammoth banks in China or those in the West the only way to catch up soon is to allow these PSBs to be merged. That is my opinion though.

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manas

Apr 1, 2010

Eventhough RBI is the regulator, it is the Banks that have made the economy sound and have always performed to the needs of the nation. Now it is high time the employees of these nationalised banks are given their right dues looking to their performance.

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SKT

Mar 31, 2010

I think it is the RBI who should be commended for the 'relative soundness' of Indian banks. Left to them, they would have also gone the herd way as was seen in them falling head over heels to lend to the realty sector before the central bank put the brakes. By the way, RBI does not have any holding any of the Indian banks, it is the government. Also, the traditional risk-averse nature of the 'Indian Pysche' is to be given the credit for the so called 'safety' of our Banks and not due to any visionary CEOs. As somebody rightly said, 'the biggest risk is not taking it'.

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