INDIAN BANKS

DURING RECESSION

AnshitaGupta Roll no – 10
Katya Cordeiro Roll no - 20
Gia D’cunha Roll no – 30
JimcyDaniel Roll no - 40
 SCHEDULE BANKS
• Included in the second schedule of the RBI act of
1934.
• Have to fill 2 conditions:
– Paid up capital and collected funds of banks
should not be less than Rs. 5 lacs.
– Any activity of the bank will not adversely
affect the interest of depositors.

E.g. SBI, ICICI, ING Vyasa,


• Divided into two:

– Commercial banks
– Co-operative banks
 COMMERCIAL BANKS
• Provides:
– Checking accounts
– Savings accounts
– Safe deposit boxes
– Currency exchange
– Term loans
– E.g. Canara bank, ICICI, HSBC etc
 Co-operative Banks
• Function on no loss, no profit basis.
• Perform all the main function of banking.
• Finance agriculture based activities, small scale
industries
• Sources of funds:
– Central and State government.
– RBI
– Other co-operative institutions.
– Ownership funds
– Deposits or debenture issues
• Intra sectoral competition is absent.
 Continued…

• Co-operatives banks are divided into two:

– Urban Co-operatives

– State Co-operatives

• E.g. Ahmedabad Mercantile Co-op Bank Ltd.

• Charminar Co-op. Urban Bank Ltd.

 Foreign banks
• Allowed to set up their subsidiaries.

• Upcoming Foreign banks

– Switzerland’s UBS

– US based GE capital

– Credit Suisse Group

– Industrial and commercial bank of China


 Regional Rural banks
• Established in rural areas.

• SBI has 30 rural banks

• Till date 14,475 rural banks in India out of which 91%

are located in rural area.

 Private and public sector banks
• 43.83% of net profit in the last quarter, December
2008.
• State Bank of India, Punjab National Bank, ICICI and
HDFC reported 40 per cent plus growth in the net
profits.
• PSU banks recorded a combined net profit of Rs
10,810 crore in the December 2008 quarter
compared to 7212 crore last year.
• Private-sector banks posted a net profit of Rs 3,185
crore compared with Rs 2,519 crore.
• SBI had reported a net profit of Rs 3,713.66 crore,
an increase of 52 per cent.
 Reasons for the growth
• Prudent measures taken by RBI.

• All other sources of income have dried up.

• Banks are a cheaper source of credit.

• Increased the credit limit.

IMPACT OF RECESSION
ON BANKS
 Has India been hit by he
crisis???
• Excessive leverage (too much debt compared to equity) is
the common culprit in all financial market crashes – be it
in 1929 (leverage by investment trusts) or 1987 and
1994 (leverage through collateralised debt and
mortgage obligations and junk bonds) or 1998
(excessive leverage by LTCM and other hedge funds)
or 2001 (leveraged bets on dotcoms) or 2008 (world-
wide leveraged bets that US housing prices would not
go down; and that interest rates won’t fall).


• While banks traditionally have higher leverage than other

businesses, countries where banks either avoided, or
were barred from investing in difficult-to-value
derivatives, and consequently did not leverage
excessively, have been left relatively unscathed. In
• ICICI Bank's overseas operations has reported
market to market losses of $264.34 million (Rs
1,060 crore) on account of its exposure to credit
derivatives and investments as on January 31, 2008


• This could wipe off up to 9% of this year’s profit for

ICICI


• ICICI and its subsidiaries abroad have an aggregate

exposure of $2.2 billion in credit derivatives.


• Other banks like the Axis bank, SBI and Bank of

Baroda also have such exposures

• ICICI Bank has the maximum exposure followed by
Bank of India’s $750 million and Bank of Baroda’s
$311 million and Axis Bank’s $150 million.
•
• But its not a crisis for Indian banks as none of the
banks have direct exposure to subprime loans


• It is just a one time profit issue which they can easily

finance this through their equity
•
• Only $1 billion out of India's total banking assets of
more than $500 billion slipped into toxic assets or
related investments. When the crisis came and
financial institutions around the world found
themselves writing off almost $1 trillion in assets
from their books, Indian banks had at most a few
 Problems faced by Indian
Banks….
• Massive liquidity tightening by the Reserve Bank of India (RBI)
in early and mid part of 2008, pushed up the cost of funds
for business and hampered growth
•
• Since mid-September, the RBI has reduced the repo rate about
five times–from 9 to 5%. And it has revised the reverse repo
rate at least thrice, from 6 to 3.5%
•
• Domestic banking is still generally secure especially
because nationalized banking remains the core of the
system
.


• Credit expansion during the period between December 19, 2008

and February 13, `09 was Rs. 8,091 crore–as per RBI data–
was sharply lower than that of Rs. 86,978 crore in the
corresponding period of the previous year.
• The total flow of resources to the commercial sector from
banks and non-banks during fiscal 2008-09–up to
February 13–at Rs 4,98,136 crore was lower than Rs
6,08,351 crore during the corresponding period of the
last fiscal.
•
• While the gross non-performing assets (NPA) went down
to Rs.4.62 billion for the period under review from
Rs.5.1 billion the previous year, the net NPA went up to
Rs.803 million (Rs.80.3 crore) from Rs.778 million
(Rs.778 crore).


• The bank’s capital adequacy ratio has come down to 12.68

percent last quarter from 13.51 percent in the
corresponding period the previous year.
•
• There has been a steady decrease in the foreign exchange
reserves held by RBI after June 2008. In June 2008,
we had $320 bn which has now decreased to $250bn in
• Despite a steep cut in policy rates by Reserve Bank of India
(RBI) since October 2008, there has not been a
commensurate reduction in lending rates by banks as fears of
rising bad loans have made them cautious in increasing
advances/lending
•
• Also commercial banks continue to refuse to fire up demand in
the system
•
• Due to the banks not lending, the sectors worst affected are
realty, automobile and SME’s.
•
• Given a situation where the FIIs are still in exit mode and trade
at an all time low, only bank lending has to take the lead to
rev up the economy.
•
• Majority of the banks have pulled out completely from FII’s
except for DeutcheBank and Citigroup. The banks who have
 S&P Ratings…..!!!!!
• Standard & Poor's Ratings Services said that it had revised the
outlook on the counterparty credit ratings for the following
Indian banks to negative from stable due to cut in Indian
sovereign credit outlook



-- Axis Bank (BBB-/A-3)
-- Bank of Baroda (BBB-/A-3)
-- Bank of India (BBB-/A-3)
-- Canara Bank (BBB-/A-3)
-- HDFC Bank Ltd. (BBB-/A-3)
-- ICICI Bank Ltd. (BBB-/A-3)
-- IDBI Bank Ltd. (BBB-/A-3)
-- Indian Overseas Bank (BBB-/A-3)
-- Indian Bank (BBB-/A-3)
-- State Bank of India (BBB-/A-3)
-- Syndicate Bank (BBB-/A-3)
-- Union Bank of India (BBB-/A-3)
• The rating agency maintained its “BBB-” long-term and “A-3”
short-term credit ratings for India. Both these ratings are at
the lowest rung of the so-called investment grade.
•
• This is due to the direct and indirect influence that the
sovereign in distress would have on a bank's operations,
including the bank's ability to service foreign currency
obligations
•

This belief stems from the following factors:


(1) Banks in India are subject to policy and regulation by the

government
(2)They invest a significant portion of funds in government
securities
(3)A high proportion of their revenue streams emanate from India
(4)A large number of Indian banks are majority owned by the
• “... India’s fiscal position has deteriorated to
a level that is unsustainable in the
medium term. We expect general
government deficit, including off budget
measures such as oil and fertilizer bonds,
to increase to 11.4% (of gross domestic
product) in the fiscal year ending March
31, 2009, from 5.7% in the previous fiscal
year,” an S&P release said.
•
• The revision (in S&P’s outlook) will have no
major impact on corporate borrowing


• It may raise overseas borrowings costs by

50 basis points and lead to a further
depreciation of the rupee
 (One basis point is one-hundredth of a
WHAT HAS BEEN DONE
SO FAR…
 RBI

The main tool in the hands of the RBI is the

monetary policy and the 3 quantitative measures are:
1) Raising or reducing Bank Rates
2) Open Market Operations
3) Variable Reserve Ratio


 Repo rate: 5%
 Reverse Repo: 3.5%
 CRR:5%
 SLR: 24%


• Prompts other banks to cut interest rates.

• RBI is to formulate separate policy for auto loan
General steps followed by banks
• Softening Home loan interest rates: liquidity
in realty sector.
• Cut in auto loan interest rates
• Initially most banks only provided benefits to
new loan takers now banks are trying to
restructure old loans as well.
•  to attract customers banks are waiving off
the processing fees. Eg: Canara Bank

•
 State Bank Of India
• SBI has emerged as the most hostile
player by announcing a special scheme
under which new home loan borrowers
are being offered an 8% rate.( Happy
Home Offer)
• Scheme is open till April 2009
• Froze interest rate on auto loans at 10%
for a year
 Canara Bank
 Allows transfer of loans
 decided to fix loan rates for 20 years by
applying different rates to varying slabs.
For loans <Rs30 lakhs


1st year- fixed rate-8.25%



2nd -5th year- fixed rate- 9.25%



6th -20th year- 200bps below the then



prevailing BPLR
For loans of Rs 30 -99 lakhs, the bank will


charge 50 basis points more

• The bank has fixed a floor rate of 10% for
the period from sixth to the twentieth
year. 
• The scheme is available till December 2009
•
• The bank has also lowered auto loan rates
from 12% to 11%
 HDFC
• HDFC has reduced home loan rates by
as much as 150 basis points following a
reduction in its cost of funds.

Loan amount Interest Rates 

< 20 lakhs 9.75%

20- 30 lakhs 9.75%
> 30 lakhs

10.75%
 ICICI
 On 5th March 2009cut interest rates for
new home loan buyers by 25-50  bps.

Loan amount Interest Rate

< 20 lakhs 9.75%

20-30 lakhs 10%

> 30 lakhs 11.5%


 not cut interest rates for existing home

loan customers. 
 Standard Chatered
 A strong focus on Asia is a major factor
behind the operating profits of $4.5
billion in 2008.
 The bank said it reduced directors'
bonuses for 2008 by between 10% and
25% and imposed salary freezes on
senior managers across regions.
 Acquired Cazenove in Asia and is looking to
buy assets of other loss making peers in
Asia including India.
 Banking

Effect on the Realty Sector

• Banks seek up to 150% collateral against
Loans
• Unitech, is looking at restructuring a Rs
800-crore loan from public sector banks.
• The Reserve Bank of India (RBI) recently
allowed banks to restructure loans taken
for commercial real estate without
turning them into non-performing assets
(NPAs).
• Pradeep Jain, Chairman,
Parsvnath Developers said, We will
approach the RBI to demand a
restructuring of existing debt by
way of Financial Institutions (FIs)
granting a minimum moratorium
period of a year.
• Public sector banks have made their
loans cheaper and private banks and
Household Financing Corporations
are expected to follow suit.
•
 Foreign VCs
• The Reserve Bank of India recently
started approving applications from
foreign venture capital investors
(FVCI) that were kept on hold for a
considerable period of time.
• 10 investible sectors.
 Investible sectors
• Infrastructure,
• Biotechnology,
• Information technology,
• Nanotechnology,
• Research in new chemical entities in the
pharmaceuticals sector, rrrrrrr
• Dairy and
• Poultry industry,
•
• Globally, there is a fight for capital and
given the present scenario in financial
markets, it is imperative that VC
investors be encouraged as they bring
long-term capital to portfolio
companies.
 FIIs
• Public Sector Bank shares are losing
charm
• Before recession, FII paid premium
prices for these shares.
• Many funds have about 17% of bank
shares in their portfolios
•
 Auto Sector
•
• Joint ventures between auto manufacturers
and banks.
• The country's largest auto maker, Tata
Motors, joined hands with public sector
lender Punjab National Bank (PNB) to
provide financing facilities to consumers for
its passenger cars.
 Sunday March 1, 02:13 AM
• SBI has slashed interest rates on auto
loan to 10%
• Union Bank of India on Saturday slashed
interest rates on new car loans by up
to 1.5%.
• Punjab National Bank announced a cut in
car loans by 50 basis points
• PSBs have been nudged by the government to
speed up credit
• Increase in auto demand
• SBI, the top auto financer, was the first to
slash rates
• Followed by Andhra bank, Central Bank of
India, Syndicate Bank, Union Bank and
others.
 Readying for a smooth ride
• Many auto firms have already joined hands
with PSBs in a bid to prop up demand
• They want PSBs to provide cost-effective
funding solutions to customers
• Hyundai Motor has tied-up with PNB, Canara
Bank and Syndicate Bankand
• Tata Motors has approached SBI to
restructure loans. It has also roped in
Corporation Bank and the Central Bank
• These reform measures have had major
impact on the overall efficiency and
stability of the banking system in
India.
• In the current scenario, banks are
constantly pushing the frontiers of
risk management.
• Consolidation, competition and risk
management are no doubt critical to
the future of banking but I
governance and financial inclusion
would also emerge as the key issues
for a country like India, at this stage
of socio-economic development.
 References
• http://indiarealestatemonitor.com/
• www.livemint.com
• www.economictimes.com
• www.rbi.org.in
• www.rupeetimes.com
• www.telegraphindia.com
• www.business-standard.com
•
•