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Emerging mkt banks getting stronger 
(Tue, 18 May Pre-Open) 
 
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.

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2 Responses to "Emerging mkt banks getting stronger"

Vinod Furtado

May 18, 2010

I agree with the above comment. It seems Equitymaster has become a forum for US bashing. Not sure why they like to do that. The only reason why India is growing faster than the US currently is because India is a "developing" economy. It remains to be seen when the infrastructure in India will be comparable to that of China. So far we are ages behind. There are also tons of high-quality companies including banks in the US.

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SVS

May 18, 2010

First of all, we shouldn't forget the early 90s in India when Indian PSBs were hit by reforms and they ran up huge losses. They did not have to go with a begging bowl to anyone because they were (and still are) owned by the government! The question of comparison US and Indian banks does not arise simply because there is no common ground. Do you know how many Banks are ther in the US? 8500 at last count and more than 3500 with asset size greater than USD 300 millon! Indian banks do not even match with the number (may be 400 if coop. banks are included) not to talk about the size. Being unaffected by crisis has nothing to do with Indian banks themselves and they have to thank Dr. Reddy for this. And talk about bank penetration and we see that our banks are still to cover a significant amount of the poupulation and geography whereas in the US every citizen has been covered. I do not understand your tirade aginst anything which is US! You perhaps don't even know the small and medium sized banks in the US which have survived the crises because your vision is blurred by the mistakes of gigantic banks like Citi and JP morgan Chase! I think we have to learn a lot from the crisis and instead of deriding others we need to look at our own backyard to build a strong and robust banking system.

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