'Indian banks better poised to cope with crisis'

DUBAI: Due to stricter prudential regulations put in place in the country, the Indian banking industry is better poised to cope with the current global financial crisis, according to a leading Indian banker.

"The Indian banking sector is better placed to cope with the adverse consequences of the ongoing financial turmoil in the West," MD Mallya, global chairman and managing director of the public sector Bank of Baroda said here.

"First of all, our banking industry is subject to stricter prudential regulations with respect to capital and liquidity," he added.

He said this as keynote speaker at a seminar on 'The Global Financial Crisis - An Analysis', organised by the Institute of Chartered Accountants of India (ICAI), Dubai Chapter, and the Indian consulate Monday night.

Mallya said the Reserve Bank of India (RBI), while restricting the overnight unsecured market for funds to banks and primary dealers, has imposed limits on their borrowing and lending operations in the overnight inter-bank call money market.

"In order to encourage greater reliance on stable sources of funding, the RBI has imposed prudential limits on banks' purchased inter-bank liabilities and these limits are linked to their net worth," he said. 

"In order to strengthen capital requirements, the credit conversions factors, risk weights and provisioning requirements for specific off-balance sheet items, including derivatives, have been reviewed in the last few years. Moreover, in India, complex structures like synthetic securitisation have not been permitted so far," Mallya added.

Reiterating that India's banking industry was quite healthy, he said: "As much as 34 percent of its deposits are in government securities and cash with the RBI. Its consumer loans to GDP ratio is just 10 percent, whereas this ratio is as high as 100 percent for the US."

The Indian banking sector's exposure to sub-prime mortgages in the West is also limited.

"The banking sector, through its overseas branches, has some exposure to distressed financial instruments and troubled financial institutions. But this exposure is part of the normal course of their business and is quite small relative to the size of their overall business," Mallya said.

According to him, what the Indian markets are witnessing today is an indirect, knock-on effect of the global financial situation.

"This is only a reflection of the uncertainty and anxiety in the global financial markets," he said, adding Indian policymakers have responded to these untoward circumstances swiftly.

"To re-establish orderly conditions in the money, equity and forex markets and to improve the overall liquidity in the system, the RBI has cut the cash reserve ratio (CRR) to 6.5 percent from the earlier nine percent in less than two weeks this month," Mallya said.

"To help mutual funds, as a temporary measure, the RBI has allowed banks to avail of additional liquidity support of up to 0.5 percent of their net demand and time deposits. This is in addition to the ad hoc reduction in the statutory liquidity ratio to 24 percent," he added.

The central bank, he said, has also allowed banks to raise interest rates on NRI deposits so that more money would flow to India.

"The policymakers have come out with a plan to raise the capital adequacy ratio of Indian banks to 12 percent by a suitable date in future. Even at present, no Indian bank has a capital adequacy of less than 10 percent. The limit on FII (foreign institutional investors) investment in corporate bonds has also been doubled," the banker said.    

Overall, he said, the macro effects of the global financial turmoil on India would remain muted due to the strength of its domestic demand and reasonably healthy balance sheets of its corporate sector.

Earlier, welcoming the gathering, India's Consul General in Dubai Venu Rajamony said though the world was reeling under a financial crisis, there were several things for India to smile about.

"You have Sachin (Tendulkar) breaking a world record, a young writer like Aravind Adiga winning the Booker Prize and the countdown to India's moon mission has started. So, life goes on in India," he said.