Indian Banking System

Status of integration with global 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

Indian Banking System

Status of integration with global 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. Summary 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.

Financial Crises
Possible downside impacts

Potential reversal of capital flows

Liquidity crises Treasury Losses from derivatives

Capital erosion due to losses

Erosion in shareholders wealth Risk management
The macro effects have so far been muted due to

Brand erosion
Job losses

Overall strength of domestic demand

Healthy balance sheets of the Indian corporate sector Predominant domestic financing of investment.

Indian Baking System

Regulation saved the day

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

Indian Baking System

Regulation saved the day

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

Indian Baking System

Impacts of Financial Crises

Export / Import down >20% leading to fall in Trade Finance

Business Fresh External Commercial Borrowing of Banks impacted due to rise in SWAP rates

Few Indian banks had invested in the collateralised debt obligations

(CDOs) / bonds which had a few underlying entities with sub-prime

exposures

Indian Baking System

Impacts of Financial Crises

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

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