Status of integration with global Banking system. Indian Banking System. A few India Banks have presence overseas Stringent RBI restriction on opening office overseas Indian Banks overseas mainly provide trade finance with host country
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Status of integration with global Banking system Indian Banking System • A few India Banks have presence overseas • Stringent RBI restriction on opening office overseas • Indian Banks overseas mainly provide trade finance with host country • Collective external commercial borrowing of all Indian Banks miniscule as % of GDP. Iceland went too far
Status of integration with global Banking system Indian Banking System • Foreign Banks presence in India • License restricted to a few branches per year • Foreign banks active mainly in capital flows to Indian Banks / Corporate sector • Also have retail presence • Indian and Foreign Banks have mutual correspondent relationship to promote trade finance & FX business
Indian Financial System - Strengths • Investments financed primarily through local savings • Prudential policies have attempted to prevent excessive recourse to foreign borrowings • GoI fiscal deficit though high but financed from Internal Savings • Current Account deficit restricted to 1-2% of GDP since 1990 • Indian approach is gradual, focused and calibrated opening of financial sector, taking into cognizance reforms in the other sectors of the economy.
Indian Financial System - Strengths • Financial markets contributing to efficient channeling of domestic savings into productive uses and are supporting domestic growth. India's external and financial sector management coupled with ample forex reserves coverage and the growing underlying strength of the Indian economy reduce the susceptibility of the Indian economy to global turbulence. Summary
Possible downside impacts Financial Crises • Potential reversal of capital flows • Liquidity crises • Treasury Losses from derivatives • Capital erosion due to losses • Erosion in shareholders wealth • Risk management • Brand erosion • Job losses • The macro effects have so far been muted due to • Overall strength of domestic demand • Healthy balance sheets of the Indian corporate sector • Predominant domestic financing of investment.
Regulation saved the day Indian Baking System • Indian banks are properly captalized and well regulated in comparison to US banks • Banks are subject to prudential regulations in regard to capital and liquidity • Banks borrowing restricted in Interbank Market; linked to networth • Strict ALM prescribed by RBI. Northern Rock type situation not possible in India • ECB severely restricted by RBI; prior permission required
Regulation saved the day Indian Baking System • Derivative instruments permitted as Risk Management Product rather than trading products • Complex synthetic derivative not permitted; will be introduced as & when effective Risk Management set up in place • Restriction of exposure to high volatile sectors like Real Estate, Stock Market etc • Tight regulation for NBFCs on prudential exposure norms, thereby eliminating systemic risks
Impacts of Financial Crises Indian Baking System • Export / Import down >20% leading to fall in Trade Finance Business • Fresh External Commercial Borrowing of Banks impacted due to rise in rates • Few Indian banks had invested in the collateralised debt obligations (CDOs) / bonds which had a few underlying entities with sub-prime exposures SWAP
Impacts of Financial Crises Indian Baking System • Few banks did suffer on account of the mark-to-market losses caused by the widening of the credit spreads arising from the sub-prime episode on term liquidity in the market, even though the overnight markets remained stable. • Few Banks had exposure on failed entities like Lehman Brothers