US home loans crisis has vapourised billions of dollars from global banks, some of them in Asia, too, but Indian counterpart remains unscathed
MUMBAI: The festering US home loans crisis has vapourised billions of dollars from global banks, some of them in Asia, too, but the Indian counterpart remains unscathed.
For once, being behind the curve is such a good thing in banking.
Bless the conservative Reserve Bank of India too, for its tough regulations on overseas investments have meant Indian banks’ exposure remains limited.
Says State Bank of India managing director T S Bhattacharya: “It’s definitely a blessing our markets are not developed. Only ICICI Bank and a few others have issued securities. Even so this is not a patch on the inventive - and risky — variations seen in US.”
ICICI Bank has a credit default swap position of $1.5 billion. “That’s less than a tenth of its investment portfolio, so it is not a huge additional balance sheet risk,” said Andrea Cheng of JP Morgan in a recent report.
A V Rajwade, forex consultant and advisor to RBI, said the fact that the Indian securities market is not developed also means investors are few and less adventurous.
“Investors in the securities market in India are mostly mutual funds compared with hedge funds in countries such as the US,” Rajwade said.
The ‘conservative’ RBI also gets kudos. Rana Kapoor, chairman and managing director of Yes Bank, said it is this quality which has helped Indian banks sidestep the current crisis.
“The regulator has to be given the highest compliment. Its foresight led to increased provisions in some sectors such as real estate. This has forced banks to take adequate lending precautions,” Kapoor said.
In February, RBI asked banks to keep aside more money (2%) every time they lent to sectors such as real estate and personal loans.
The RBI also does not allow banks to invest it any paper lower than AAA-grade abroad. That, too, is subject to some maximum ceiling.
The lessons of the balance of payment crisis in 1991 and the Asian currency crisis of 1997 has been well ingrained in Mint Road.
However, Abheek Barua, chief economist, HDFC Bank, staying cautious is fine, but staying away is not.
“We have to be cautious but staying away from such risky instruments won’t help as it may impede growth. We have to move towards developing the credit markets to catch up with the rest of the world,” Barua said.
Bankers said the central bank will have to be pre-emptive but that does not mean raising rates for 17 consecutive times like the US Fed did, or keeping monetary conditions too easy - again, like the Fed did.
“First of all, lend only to businesses you understand,” Rajwade said. “It is important to appreciate that computer-based borrower models have their limitations. For nobody can predict the future.”
In other words, good ol’ diligence can’t be sacrificed for growth. Especially when it comes to personal loans and credit cards, where rates are high and credit histories hazy.
Yes Bank’s Kapoor said some banks are facing a spike in bad loans because of higher lending to these sectors.
“They have to go back to the old basics on loan pricing, documentation and ratings when lending,” he said. SBI’s Bhattacharya points out that when it comes to lending for consumption, it pays to be doubly careful “since it does not create an asset” that a bank can take recourse to if loans go bad.
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