The Indian financial system in general and banks in particular have acquitted themselves creditably in the face of the serious global crisis. The reasons why the domestic financial institutions have remained robust and resilient when many of the world’s top banks and institutions collapsed and had to be rescued with public money are fairly well known by now. The Reserve Bank of India‘s report on trend and progress of banking for 2008-09 provides an incisive analysis of the developments that made last year a valuable learning period for the banks and regulators everywhere. The exposure of Indian banks to the toxic assets was minimal. More importantly, the RBI’s counter-cyclical prudential measures, during both the credit boom and the downturn, have played a significant role in minimising the deleterious consequences of the crisis. The second point, not fully appreciated initially, has since been given its due in policy discussions even at the global level. The initiatives taken by the RBI were mainly aimed at strengthening the banking system and financial markets while ensuring uninterrupted flow of credit to different sectors of the economy. The monetary policy shifted its focus from monetary tightening during the first half of 2008-09 to “aggressive easing” in the second half, using both conventional and unconventional tools.
If Indian banks and their regulators can take credit for coping well with the crisis, the outlook for the global banking sector remains weak on both sides of the Atlantic over the medium- and long-term, despite the critical rescue programmes. Although the financial regulatory system in the U.S. was shown up as a major lacuna during the crisis, no comprehensive overhaul has taken place. As the global economy improves by next year, the level of complacency might increase. There is an urgent need for achieving a greater degree of coordination in regulatory policies across the world. Almost all the factors that were behind the crisis have global implications. For instance, financial innovation and integration have increased the speed and extent to which shocks are transmitted across asset classes and countries, blurring the distinction between banks and other institutions. The nascent stage of development of the credit derivatives market in India and the perseverance of prudential policy that discourages excessive risk taking are some of the factors that helped banks and markets insulate themselves. Obviously, these policies will have to be reviewed in order to reinforce financial stability, financial sector governance, and risk management practices.
Keywords: Indian financial system, global crisis, Reserve Bank of India, risk management practices, global banking sector
The people of the country by nature are very conservative and follow the age old wisdom of saving the penny for a rainy day and therefore do not indulge in reckless consumerist spending that is prevalent in most parts of the world. This may be one of the key reasons why the Indian financial system is withstanding the vagaries of the global financial system.
Except for some initial jerks felt by the system, the Indian financial system, involving both the banking and non-banking financial institutions, has really proved relatively resilient, as compared to its counterparts in the developed western countries, where the recklessness of the deregulated too-big-to fail financial institutions did ultimately cause a tsunami of global economic and financial crisis. Some of the factors that did help the financial system withstand the crisis, and worked as cushion, could be the well coordinated and calibrated moves by the government and the apex bank at the balanced pursuit of the financial and monetary policies; an adequate kitty of foreign exchange reserve; prudential lending by banks; economic stimulus provided by the government; an austere life style of common Indians; and the nascent stage of financial market innovations and complex products, like derivatives, futures and mortgage securities etc.
Please Email the Editor