Indian banks have escaped the financial tsunami that has wrecked many of their illustrious counterparts the world over. There is irony when the country’s stringent regulatory framework, considered stifling in better times, is now being lauded for its far-sightedness. Similarly, Indian banks, which were earlier criticised for what many called a head-in-the-sand approach, are now wearing their limited international presence as a badge of honour. Are we celebrating too early, and for the wrong reasons?
It is true that conservative regulatory policies and the focus on safety have paid off. As the cover story shows, Indian banks have almost zero credit risk and the balance sheets have significant liquidity. Consider these facts: Over 90 per cent of liabilities with the banks are in the form of deposits. Almost 75 per cent of risk assets are in the form of loans rather than bonds or securities. The industrial loan book is also fairly diversified across sectors and the consumer exposure, including mortgages, is less than 25 per cent of the system’s loan book.
But what is of concern is that some of India’s finance leaders have been using the global turmoil to disparage the very reforms they have been pushing for all these years. They point to the fall of Wall Street investment firms as proof that deregulation is not in India’s best interest. This is sad, because if America’s sub-prime, CDO and CDS crisis showed the pitfalls of poor regulation being exploited by greedy operators who were unmindful of risk, India illustrates the opposite danger.
That was the consensus at the Business Standard Banking Round-Table discussion, excerpts from which you can read from Page 16. The participants said banks in India continue to lack the capital needed to sustain growth and that over-regulation often inhibits innovation. Speakers also felt that Indian banks have a huge branch network, but not enough capital. Size was another issue that came up during the discussions. One of the questions asked was whether as many as 87 banks with a total market capitalisation of $140 billion and a total balance-sheet of less than $1 trillion can meet the demands of a rapidly growing economy.
The Banking Annual is also about celebrating success. The Best Banker award this year goes to HDFC Bank MD & CEO Aditya Puri for transforming the 14-year old institution into a financial powerhouse. HDFC Bank today has the largest branch network among all private sector banks in the country, courtesy the acquisition of Centurion Bank of Punjab. The smooth integration process of the buy tilted the scales in his favour. In many ways, Puri is a pioneer of sorts in M&As, having acquired Times Bank way back in 2000. That was the first merger of two new-generation private banks in the country.
Enjoy this comprehensive snapshot of where the banking industry has arrived in its increasingly exciting journey.