Financial Times

Indian banks smug as banking crisis rolls past


NEW DELHI, Nov 14, 2008 (AFP) - While some of the world's biggest banks are lurching from one crisis to another amid the global financial turmoil, Indian officials are feeling just a little bit smug. For years Indian banks chafed at the cautious regulatory hand of the central bank as they watched their foreign counterparts make massive profits from high-risk lending and ambitious derivative plays.

Now it seems that the steadying hand they resented for so long has helped insulate India's banks from much of the negative fallout of the current global problems, officials said. Banking regulation “has actually paid off for the country,” chief government economic advisor Arvind Virmani said.

In fact, the financial soundness of India's banking system means the sector “approaches the current financial turmoil from a position of strength,” said Goldman Sachs economist Tushar Poddar. India's government has said it is determined at this weekend's G-20 meeting of the biggest developed and emerging nations in Washington to drive home the message that it wants improved regulation and supervision to prevent future global financial crises.

Comparing the subprime lending debacle that originated in the US to the “activities of a casino,” Prime Minister Manmohan Singh said this month he wanted reform of the global financial system to tackle the “economically damaging role of excessive speculative activity”.

The current crisis will not have a big impact on the health of India's banking system simply because the country did not have the exotic derivative instruments or permit the unsupervised mortgage lending that triggered the meltdown, Indian officials said.

“We've not been as exposed to these new and innovative instruments,” said senior government economic planner Montek Singh Ahluwalia. “I don't think the direct impact on the financial system is going to be significant at all.”Mortgage lending to people with unhealthy credit records at rock-bottom interest rates as in the United States did not exist in India.

“Perversely the very bureaucratic and regulatory controls that frustrated many international investors proved to be a good firewall for India's banking system against the credit virus from the West,” said Deepak Lalwani, India director at Astaire and Partners, based in London.

India's banks, like their global counterparts, are suffering from a liquidity crunch. But the sector is “essentially sound with high capital adequacy, low non-performing loans and its exposure to inflated real estate is small,” said Poddar.

Figures from the second-quarter earnings season showed better-than-expected profits for the banks, up an average 26 percent for the three months to September. In the US, retired Federal Reserve chairman Alan Greenspan, who oversaw the go-go years of economic boom, was a leading proponent of deregulation, believing free markets should be self-regulatory.

In contrast, India's central bank under its also recently retired chief, Yaga Venugopal Reddy, was a paragon of caution. Under Reddy's rule, the central bank did not embrace the American “lite”regulation philosophy in which banks were allowed to chase returns in areas far removed from their core lending and deposit business.

His successor, Duvvuri Subbarao, has a similar reputation for caution. “One can definitely say if lending rates had been very aggressive and if they'd allowed more instrument s, more derivatives, we'd have been that much more exposed to the sub-prime crisis,” said Dharma Kriti Joshi, principal economist at Crisil credit rating agency, an arm of Standard and Poor's.

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