At no time has the stark difference between the banks of the rich world and those of the emerging markets including India been more apparent than at the height of the global financial crisis. During this crisis, big global banks were brought down to their knees by that section of the population known as the subprime borrowers. Global banks wanted to grow aggressively. And inorder to do that 'financial engineering' was given importance, lines became blurred between investment and commercial banking operations and the credit profile of potential customers were not rigourously looked into. The final outcome of this was there for everyone to see.
In contrast banks in the emerging markets fared much better. Take the case of India. Indian banks were relatively unscathed from the global crisis which crippled US and European banks and compelled them to run with a begging bowl to their respective governments. So what did Indian banks do better than their Western counterparts. They stuck to the sound principles of good, solid, conservative banking. As reported in the Economist, emerging market banks including those in India are of the old-school, with branches, profits, low pay and high capital. What is more, they are also much more tightly regulated than the banks in the rich world.
Emerging market banks have managed to tide over the crisis rather well. However, they still have a tough issue to address. Emerging economies need solid banks to grow fast. But too much fast growth will then undermine the safety of banks. Their mettle will be tested especially during the time when the consumers decide to spend more and deposit less with banks. Also, businesses would then want to tap the international markets for capital rather than access banks. This could then thwart to some extent the latter's growth.
Will banks in the emerging markets then throw caution to the winds? Will they pursue growth at the cost of safety? In India's case atleast the RBI has displayed a lot of independence in framing its policies for the Indian banking sector. And given the strong growth potential in the country, the idea of Indian banks following the footsteps of their beleaguered Western counterparts certainly seems less likely.