Friday October 23, 02:41 AM

Source: Indian Express Finance

Indian banking system weathered downturn well, says RBI report

By fe Bureaus
The Indian banking system has exhibited resilience against the backdrop of global financial turmoil and slowdown of the Indian economy. The Reserve Bank of India s (RBI) report on the trend and progress of banking in India for 2008-09, has depicted that despite facing a slowdown, the country has so far never witnessed a banking crisis. Analysing the strength of the Indian banking system RBI s report has highlighted that notwithstanding some slowdown in growth of balance sheet, income and profitability, the overall capital to risk-weighted assets ratio (CRAR) has improved and the asset quality remains at a comfortable level. The Indian banking system has thus remained sound and robust. As the commercial banks are the dominant institutions with linkages to other segments of the Indian financial system, the strength of this sector has provided an anchor to the Indian economy in turbulent times, said the report released on Thursday. Contrary to the trend in some advanced countries, the leverage ratio (tier-I capital to total assets ratio) in India has remained high reflecting the strength of the system, said the report. For instance, as observed by the World Bank, the leverage ratio of banks in the UK witnessed a decline throughout 1990s, which was accentuated after 2000 to reach a level of about 3% by 2008 from around 5% in the 1990s. On the other hand, the leverage ratio for Indian banks has risen from about 4.1% in March 2001 to reach a level of 6.3% by March 2009. The main reasons of insulation is that Indian banking can be attributed to the nascent stage of development of the credit derivatives market. The facts that regulatory guidelines on securitisation do not permit immediate profit recognition, perseverance of prudential policies which prevent institutions from excessive risk taking and financial markets from becoming extremely volatile and turbulent and a close co-ordination between supervision of banks and their regulation have prevented Indian banking system from the ill effects of the global financial crisis . The report highlights that on different parameters like regulatory CRAR, non-performing loans (NPLs), provisions and return on assets (ROA), India has performed better than some of the other developing and developed economies. For instance, NPLs for Indian banks in 2008 have stood at 2.3% as against its peers abroad like Indonesia, Phillippines and South Africa, which have seen its NPLs growing at 3.5%, 5.2% and 2.6% respectively. Provisions on loans on an average for Indian banks have also been lower at 52.6% in 2008, as against 84.7% in the US and Australia at 87.2%. Impact on Indian banking, however, has been rather muted providing a relatively bright outlook way ahead if Indian banking can reap the structural drivers from within, the report added. The CRAR of SCBs improved to 13.2% at end-March 2009 from 13.0% a year ago, thus, remaining significantly above the stipulated minimum of 9.0%. Talking about the outlook on the overall banking system, the report said that it is expected to become a less fashionable and even more heavily regulated industry with greater state involvement, increased investor scrutiny and substantially higher capital levels.