Indian banks return more than Asian peers: RBI

There is good news for Indian banks. Reserve Bank of India governor D Subbarao said on Friday that Indian banks have typically posted higher earnings than the banks of other leading Asian economies as measured by return on assets (RoA) and return on equity (RoE).

ROA gives an idea as to how efficient the management of the bank is at using its assets to generate earnings and RoE measures a bank’s profitability by revealing how much profit it has generated with the money shareholders have invested.
Speaking at a seminar held in Mumbai, Subbarao said that Indian banks will not have any problem in adjusting to the new capital rules both in terms of quantum and quality laid down under the Basel-III norms.

“Indian banks will not have a problem in meeting the leverage ratio requirement since the Tier I capital of many Indian banks is comfortable (more than 9%) and their derivatives portfolios are also not very large,” he said.

But that does not mean that there are no challenges.  According to Subbarao, the major challenge for Indian banks in implementing the liquidity standards will be to develop the capability to collect the relevant data accurately and granularly.

“We do not have much experience to fall back on since our financial markets have not experienced the levels of stress that advanced markets have. Predicting the appropriate stress scenario is, therefore, going to be a complex judgment call,” said Subbarao.

On aspiration of many Indian banks to expand globally, Subbarao said the main argument is that the increasing global size and influence of Indian corporates warrant a corresponding increase in the global footprint of Indian banks.

The opposing view is that Indian banks should look inwards rather than outwards, focus their efforts on financial deepening at home rather than aspiring global size. But Subbarao said that it is possible to take a middle path and argue that looking outwards towards increased global presence and looking inwards towards deeper financial penetration are not mutually exclusive; it should be possible to aim for both.

The RBI governor also said that there will be the challenge of meeting the credit needs of a rapidly growing economy even while adjusting to a more demanding regulatory regime.