Economic Slowdown and Indian Banking Sector

8/6/2019 Economic Slowdown and Indian Banking Sector

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Economic Slowdown and its effects on big business

An Economic slowdown is a decline in a country's gross domestic product (GDP) growth for

two or more consecutive quarters of a year.

An Economic slowdown is also preceded by several quarters of slowing down. An

economy, which grows over a period of time, tends to slow down the growth as a part of the

normal economic cycle. An economy typically expands for 6-10 years and tends to go into a

recession for about six months to 2 years. A recession normally takes place when consumers

lose confidence in the growth of the economy and spend less. This leads to a decreased

demand for goods and services, which in turn leads to a decrease in production, lay-offs and asharp rise in unemployment. Investors spend less; as they fear stocks values will fall and thus

stock markets fall on negative sentiment.

Impact on big business

As sales revenues and profits decline, the manufacturer will cut back on hiring new

employees, or freeze hiring entirely. In an effort to cut costs and improve the bottom line, the

manufacturer may stop buying new equipment, curtail research and development and stop new

product rollouts (a factor in the growth of revenue and market share). Expenditures for marketing

and advertising may also be reduced. These cost-cutting efforts will impact other businesses,

both big and small, which provide the goods and services used by the big manufacturer.


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Impact on Indian banking sector

The Recession that began in December 2007 impacted the revenues and profitability of

businesses worldwide. In India, it was the real economy that got impacted first on account of

exports and the drying up of overseas finance for many firms. Banks were affected indirectly by

the slowing down of the economy. Indian banks had not just survived the crisis but appear to had

emerged even stronger from the recession and even gone ahead and post reasonable profits in

the year 2008- 2009.

Unlike in the west where credit supply had collapsed, credit grew at 25% in 2007-08 and

by 24% in the next year.

Influenced by the global financial turmoil and repercussion of the subprime crisis, theglobal banking sector had witnessed some of the largest and best known names succumb to

multi-billion dollar write-offs and face near bankruptcy. However, the Indian banking sector has

been well shielded by the central bank and has managed to sail through most of the crisis with

relative ease.


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Inter-sectoral analysis : Private and Public sector

Note :- These figures have been taken from www.finmin.nic.in

Th e review of t h e Monetary Policy by t h e RBI for t h e t h ird quarter of 2008-09 said:

Th ere h as been a noticeable variation in credit expansion across bank groups. Expansion

of credit by public sector banks was muc h h igh er t h is year t h an in t h e previous year, w h ile

credit expansion by foreign and private sector banks was significantly lower.


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D eposit accretion

This credit expansion by the banking sector was also reflected in the deep divergence in

the pace of growth in deposits among the banks. It was only the public sector banks which could

maintain the pace of growth in deposit accretion at 24.2 per cent.

Deposit accretion in foreign banks fell sharply from 34 to 12 per cent and for private sector

banks from 27 to 13 per cent. Backed by the steady pace of growth in deposits, the growth in

public sector banks disbursal also grew quite significantly

Meanwhile, there was a deceleration in credit extension by foreign and private sector

banks during 2008.


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Capital Adequacy RatioC apital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting

the time liabilities and other risk such as credit risk, operational risk.

C apital adequacy ratios (" C AR") are a measure of the amount of a bank's capital expressed as a

percentage of its risk weighted credit exposures.

C apital adequacy ratio is defined as: C AR = C apital/Risk

Indian banks also enjoyed higher levels of money supply, credit and deposits as a percentage of

GDP in FY09 as compared to that in FY08 showing improved maturity in the financial sector.


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The F ive reasons why big banks were able to beat the Global Economic slowdown and rake in

the profits are

:

1. Underwriting increases provides investment banks with more income as businesses go to

investment banks. Banks that do the underwriting collect fees, and if they actually make the

loans, they also collect the interest.

2. T rading revenue is also up as investors try to play the market, getting in when prices are low

and trading to take profits on the rallies. Many of the big banks (like Goldman) do over the

counter trades, so they get commissions as well.

3. Less competition is the result of failed banks and takeovers. This means a bigger piece of the pie for those banks that are left.

4. T oxic assets have been working their way through the system. Additionally, some banks (like

Goldman) had limited exposure to toxic assets to begin with.

5. Retail banking has been providing a boost. People still need a place to keep their money.

With a lower Fed funds rate, they can pay less in interest to their savings customers, while still

charging between 5% and 10% interest (more for credit cards) on loans they make. That

difference is resulting in profitability.


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Cooping of Strategy

y strict regulation and conservative policies adopted by the Reserve Bank of India had

ensured that banks in India were relatively insulated from the travails of their Western

counterparts.

y Indian banks are well-capitalized with a low level of non-performing assets (NPAs), The

ratio of net NPAs to net advances is down to 1%, down from 9% a decade ago.

y The Reserve Bank of India had initiated a series of steps to ease the liquidity problems

being faced by banks.

o It had cut the cash reserve ratio to 5.5% and the repo rate at which the central

bank pumps liquidity into the system to 7.5%.

o It has also reduced the SLR or statutory liquidity ratio to 24%, down from 25%earlier.

y The strong capitalization of Indian banks, with an average Tier I capital adequacy ratio of

above 8 per cent, was a positive feature in their credit risk profile.

y Indias growth process had been largely domestic demand driven and its reliance on

foreign savings has remained around 1.5 per cent in recent period. It also had a very

comfortable level of forex reserves.


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Objective & Justification

Banks act as important players in the financial markets as they play a vital role in

the economy of a country. The banking sector in India should be structured in such

a way that it can deal with any adverse economic crisis or breakdown created by

global environment.

y For this reason it is essential to study all the factors which were responsible

for the economic slowdown.

y Preventory majors should be taken to avoid the impact of any further global

crisis on banking sector of India.y Banks should be restructured in such a way that if further there is a

possibility of slowdown then it has minimum effect on India

y Greater transparency about the risk in banks' portfolios.

Documents

Economic Slowdown and Indian Banking Sector