| Banks stand tall |
Amidst all the gloomy news from Wall Street about big-ticket marquee brands falling like a pack of cards, the sentiment in the Indian financial system at the most bordered concern but never alarmist.
There were strong reasons for it -
Firstly, the Indian financial sector is dominated by the nationalised banks that are fairly well regulated by the RBI, so chances that they have ventured into high-risk investments is considerably less.
Secondly, they have limited or no exposure to the subprime crisis.
Thirdly, the Indian economy per se was not going through a downtrend at the start of the bloodbath in the West, thereby allowing Indian banks to breathe easy.
But cracks became evident slowly, underlying the fact that no matter how hard we try to project ourselves as being independent, we are very much connected to the global economy.
For the start Indian banks are grappling with the all-evident liquidity crunch that arose after the FIIs started to pull out money to tackle the fires at home. And, a liquidity crisis led to upward movement of interest rates and an apparent reluctance by banks to lend money to industry, especially the real estate sector.
Thereby ensuring that the Indian economy as a whole is now feeling the impact.
Additionally, the departure of much-valued foreign funds also reduced the collateral value of shares of Indian companies as well, a situation that further aggravated the problem of capital inadequacy.
The hardest hit is the Non Banking Financial Companies (NBFCs). Banks are facing a very tight liquidity situation and since liquidity is what NBFCs need the most, these companies are feeling the pinch.
And, expectedly thier profits have fallen from the peak of 60.3% last year to just 18.2% in September ’08.
The RBI, like always acted guardian angel to contain the damage by reducing the CRR, SLR and repo rates and swiftly providing fresh lines of credit to pump in Rs 2.5 lakh crore in to the system.
Undoubtedly, Indian banks would have to go through Litmus Test in early 2009 and if they pass off unscathed, the new world order where India along with China play the lead roles is for sure in the making!
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