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Comparision Of Banking System Of US,Europe and India
Submitted To: Mrs. Payal Singh Submitted by: Aakriti Gupta Sukriti Sharma Rashmeet Kaur Shobhana Saxena Rishabh Mehta Rhythm Pangotra
Recent time has witnessed the world economy develop serious difficulties in terms of lapse of banking & financial institutions and plunging demand. Prospects became very uncertain causing recession in major economies. However, amidst all this chaos India’s banking sector has been amongst the few to maintain resilience. A progressively growing balance sheet, higher pace of credit expansion, expanding profitability and productivity akin to banks in developed markets, lower incidence of nonperforming assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep the economy rolling. The way forward for the Indian banks is to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks.
GENERAL BANKING SCENARIO
The predicament of the banks in the developed countries owing to excessive leverage and lax regulatory system has time and again been compared with somewhat unscathed Indian Banking Sector. An attempt has been made to understand the general sentiment with regards to the performance, the challenges and the opportunities ahead for the Indian Banking Sector. A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was in a very good to excellent shape, with a further 25% feeling it was in good shape and only 6% of the respondents feeling that the performance of the industry was just average. In fact, an overwhelming majority (93.33%) of the respondents felt that the banking industry compared with the best of the sectors of the economy, including pharmaceuticals, infrastructure, etc. Most of the respondents were positive with regard to the growth rate attainable by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth would be between 15-20% for the year 2009-10 and greater than 20% for 2014-15.
Key effects of major International Banking Crisis
The banking crises have bought various losses. Private households that have suffered considerable loss in wealth will raise their saving rates. The many recapitalization of banks implemented by various governments in Euro zone the UK and the USA a will raise medium term debt GDP ratio and hence current and future tax rate. There is also some probability that venture capital financing will become more difficult in many OECD countries in the long run, since the risk premium have increased and since private equity funds will become eager to finance.
US Banking System
With nearly 90,000 branches and 371,000 automated teller machines (ATMs), US banking system is the largest in the world. As of September 30th 2004, US banks had US$9.88 trillion in assets and US$5.98 trillion in total loans. US banking is more diverse than in most Western countries. Despite ongoing consolidation, vigorous competition exists within the vast banking community, which includes financial holding companies that operate nationwide, dominant regional banks and smaller independents. Large foreign banks also continue to expand in the US market. Federal Reserve The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. Today, the Federal Reserve’s duties fall into four general areas: - conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates; supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers; - maintaining the stability of the financial system and containing systemic risk that may arise in financial markets; - providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system. A network of twelve Federal Reserve Banks and their Branches (twenty¬ five as of 2004) carries out a variety of System functions, including operating a nationwide payments system, distributing the nation’s currency and coin, supervising and regulating member banks and bank holding companies, and serving as banker for the U.S. Treasury. The twelve Reserve Banks are each responsible for a particular geographic area or district of the United States. Each Reserve District is identified by a number and a letter. Besides carrying out functions for the System as a whole, such as administering nationwide banking and credit policies, each Reserve Bank acts as a depository for the banks in its own District and fulfills other District responsibilities. Member Banks The nation’s commercial banks can be divided into three types according to which governmental body charters them and whether or not they are members of the Federal Reserve System. Those chartered by the federal government (through the Office of the Controller of the Currency in the Department of the Treasury) are national banks; by law, they are members of the Federal Reserve System. Banks chartered by the states are divided into those that are members of the Federal Reserve System (state member banks) and those that are not (state nonmember banks). State banks are not required to join the Federal Reserve System, but they may elect to become members if they meet the standards set by the Board of Governors. As of
.state-chartered banks that are members of the Federal Reserve System (state member banks).March 2004. Bank regulation entails issuing specific regulations and guidelines governing the operations. does not carry with it the control and financial interest conveyed to holders of common stock in forprofit organizations.S.non. . Although the terms bank supervision and bank regulation are often used interchangeably. banking organizations may conduct international banking activities. operations. they actually refer to distinct. and the stock may not be sold or pledged as collateral for loans.S. and examining of banking organizations to assess their condition and their compliance with relevant laws and regulations.700 commercial banks approximately 2. state-licensed branches.bank holding companies. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. institutions. agencies. . however. Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6 percent of their capital and surplus. Setting up a system of rules. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U. Member banks receive a 6 percent dividend annually on their stock. . . activities. and vote for the Class A and Class B directors of the Reserve Bank.S. Bank supervision involves the monitoring. activities.S.Edge and agreement corporations. the Federal Reserve may use its supervisory authority to take formal or informal action to have the organization correct the problems. which today is part of the World Bank Group. When a banking organization within the Federal Reserve’s supervisory jurisdiction is found to be noncompliant or to have other problems. Stock in Federal Reserve Banks is not available for purchase by individuals or entities other than member banks. Bretton Woods system The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid-20th century. dollar and the ability of the IMF to bridge temporary imbalances of payments. and procedures to regulate the international monetary system.000 national banks and 900 state banks. half of which must be paid in while the other half is subject to call by the Board of Governors. through which U.foreign branches of member banks. and acquisitions of banking organizations. . and representative offices of foreign banks. but complementary. Supervisory Function of the Federal Reserve The Federal Reserve has responsibility for supervising and regulating the following segments of the banking industry to ensure safe and sound banking practices and compliance with banking laws: .banking activities of foreign banks. as specified by law.U. inspecting. including diversified financial holding companies formed under the Gramm-Leach-Bliley Act of 1999 and foreign banks with U.approximately 2. the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).900 were members of the Federal Reserve System . It is merely a legal obligation of Federal Reserve membership. of the nation’s approximately 7. The holding of this stock.
monetary policy expansion and institutional bailouts. and the failure of regulators. In accordance with the treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank." Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products. is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. and that governments did not adjust their regulatory practices to address 21st-century financial markets. resulting in numerous evictions. For this reason the Euro system (which excludes all the NCBs which have not adopted the euro) became the institution in charge of those tasks which in principle had to be managed by the ESCB. The United States Senate issued theLevin–Coburn Report. In many areas. leading to a severe global economic recession in 2008. the housing market also suffered.S. damaging financial institutions globally.S Banking Crises The late-2000s financial crisis. dollars. the primary objective of the Euro system is to maintain price stability (in other . undisclosed conflicts of interest. In response to the financial crisis. but the result of high risk. Questions regarding bank solvency. Economies worldwide slowed during this period. The financial crisis was triggered by a complex interplay of valuation and liquidity problems in the United States banking system in 2008. declines in consumer wealth estimated in the trillions of U. complex financial products. The 1999 repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks.The bursting of the U. which peaked in 2007.S. the financial crisis itself ended sometime between late-2008 and mid-2009.U. Governments and central banks responded with unprecedented fiscal stimulus. and a significant decline in economic activity. It contributed to the failure of key businesses. foreclosures and prolonged unemployment. the bailout of banks by national governments and downturns in stock markets around the world. as credit tightened and international trade declined. and the market itself to rein in the excesses of Wall Street. also known as the Global Financial Crisis (GFC) or the "Great Recession". Functions Since not all the EU states have joined the euro. caused the values of securities tied to U. Although there have been aftershocks. real estate pricing to plummet. European Banking System The European System of Central Banks (ESCB) is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States. the credit rating agencies. declines in credit availability and damaged investor confidence had an impact on global stock markets. where securities suffered large losses during 2008 and early 2009. housing bubble. Many causes for the financial crisis have been suggested. both market-based and regulatory solutions have been implemented or are under consideration.S. with varying weight assigned by experts. It resulted in the collapse of large financial institutions. the ESCB could not be used as the monetary authority of the euro zone. which found "that the crisis was not a natural disaster.
In addition.e. Without prejudice to this objective. The Governing Council comprises all the members of the Executive Board and the governors of the NCBs of the Member States without a derogation. the Vice-President and four other members. as appropriate. The main responsibilities of the Governing Council are: to adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the Eurosystem. assisted by the NCBs. shall also exist. on a recommendation from the Council of Ministers after it has consulted the European Parliament and the Governing Council of the . The basic tasks to be carried out by the Euro system are: to define and implement the monetary policy of the euro zone. Organization The process of decision-making in the Eurosystem is centralized through the decision-making bodies of the ECB. the Euro system shall support the general economic policies in the Community and act in accordance with the principles of an open market economy. The Executive Board comprises the President. particularly where Community or national legislation is concerned. and to establish the necessary guidelines for their implementation. has the task of collecting the necessary statistical information either from the competent national authorities or directly from economic agents. As long as there are Member States which have not adopted the euro. the Euro system contributes to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system. and to promote the smooth operation of payment systems. decisions relating to intermediate monetary objectives. including. all chosen from among persons of recognized standing and professional experience in monetary or banking matters.words control inflation). the ECB. namely the Governing Council and the Executive Board. They are appointed by common accord of the governments of the Member States at the level of the Heads of State or Government. key interest rates and the supply of reserves in the Eurosystem. to formulate the monetary policy of the euro area. a third decision-making body. The ECB has an advisory role vis-à-vis the Community and national authorities on matters which fall within its field of competence. Finally. those countries which have adopted the euro. the General Council. The NCBs of the Member States that do not participate in the euro area are members of the ESCB with a special status – while they are allowed to conduct their respective national monetary policies. they do not take part in the decision-making with regard to the single monetary policy for the euro area and the implementation of such decisions. in order to undertake the tasks of the ESCB. to conduct foreign exchange operations. to hold and manage the official foreign reserves of the Member States. i.
and removal from office is only possible in the event of incapacity or serious misconduct. When performing Euro system-related tasks. still have to be performed in Stage Three of Economic and Monetary Union (EMU). The subscription of capital is based on a key established on the basis of the EU Member States' respective shares in the GDP and population of the Community. The NCBs of the non-participating countries have to pay up 7% of their respective subscriptions to the ECB's capital as a contribution to the . It has. the establishment of the necessary rules for standardizing the accounting and reporting of operations undertaken by the NCBs. The General Council comprises the President and the Vice-President and the governors of the NCBs of all 27 Member States. nor an NCB. the preparation of the ECB's annual reports. owing to the derogation of one or more Member States. the collection of statistical information.ECB (i.e. neither the ECB. The euro area NCBs have paid up their respective subscriptions to the ECB's capital in full. The ECB's capital amounts to €5 billion. The NCBs are the sole subscribers to and holders of the capital of the ECB. a minimum non-renewable term of office for members of the Executive Board of eight years (a system of staggered appointments was used for the first Executive Board for members other than the President in order to ensure continuity). the taking of measures relating to the establishment of the key for the ECB's capital subscription other than those already laid down in the Treaty. the laying-down of the conditions of employment of the members of staff of the ECB. thus far. The General Council performs the tasks which the ECB took over from the EMI and which. and to execute those powers which have been delegated to it by the Governing Council of the ECB. and the necessary preparations for irrevocably fixing the exchange rates of the currencies of the Member States with a derogation against the euro. in doing so. to give the necessary instructions to the NCBs. The main responsibilities of the Executive Board are: to implement monetary policy in accordance with the guidelines and decisions laid down by the Governing Council of the ECB and. been paid up to an amount just over €4 billion. nor any member of their decision-making bodies may seek or take instructions from any external body. the Council of the European Monetary Institute (EMI) for the first appointments). The General Council also contributes to: the ECB's advisory functions. The Community institutions and bodies and the governments of the Member States may not seek to influence the members of the decision-making bodies of the ECB or of the NCBs in the performance of their tasks. The Statute of the ESCB makes provision for the following measures to ensure security of tenure for NCB governors and members of the Executive Board: a minimum renewable term of office for national central bank governors of five years. The Euro system is independent. in this respect the Court of Justice of the European Communities is competent to settle any disputes.
the debt-service burden will rise. the European Summit in October 2010 pondered the notion that private creditors might have to bear some of the pain via mechanisms being put together to deal with future sovereign-debt crises. tax revenues fall. making it difficult for them to borrow. as well as home-grown. and Spain. while the prevailing high interest rates increase their debt service costs. Similarly. for the first time. while in return each NCB was credited by the ECB with a claim in euro equivalent to its contribution. the ECB was endowed with an initial capital of just under €4 billion. the sovereign debt crisis worsened on market concerns about the difficulty of budget consolidation. In late 2010. . Euro Debt and Banking Crisis Introduction Europe has been beset by two interrelated crises: (i) a banking crisis. As a result. The contributions of each NCB were fixed in proportion to its share in the ECB's subscribed capital. Markets are concerned that the prospect of very weak growth and high unemployment resulting from fiscal consolidation. Where the marginal borrowing rate exceeds the average rate on the outstanding stock of debt. making consolidation efforts even more difficult to achieve. and the remaining 85% in US dollars and Japanese yen. as growth weakens. stemming from losses in capital market securities (including US subprime and other structured products). and (ii) a sovereign debt crisis exacerbated by recession.operational costs of the ECB. Greece and Ireland have faced very significant adverse movements in their yield spreads relative to euroarea benchmark bonds. The market has even begun to ponder whether the crisis could spread further. the NCBs of the Member States participating in the euro area have provided the ECB with foreign reserve assets of up to an amount equivalent to around €40 billion. transfers to help banks. boombust problems in the property markets of some EU countries. and years of painful structural adjustment. Such concerns add to the crisis countries’ problems. and in some cases very poor fiscal management over a number of years that was inconsistent with the principles laid down in the Stability and Growth Pact and the Maastricht Treaty. In addition. 15% of the contributions were made in gold. will make the temptation to restructure sovereign debt too great to be ignored. and whether the euro system in its current form is sustainable. and to a lesser extent this is also the case for Portugal.
can be to increase the likelihood of future exclusion from global capital markets. however. as well as credit rating downgrades that result in the bond issuer having to pay higher spreads. • Carrying out structural reforms to improve the real component of the rate of nominal growth (g). Were the ECB to carry out quantitative easing to the point where EU-wide inflation accelerated. noting that here g refers to the nominal growth of GDP (i. thereby making it easier for countries to achieve macro goals. the sum of real growth and inflation). Labour market. the debt service burden is reduced. • Restructuring the level of outstanding debt (dt1). The main benefit is the ability to cut the debt-service burden to credible levels overnight. which is essential to . to ensure they are fully funded. Inflation surprises essentially reduces the real burden of the debt.6The economic costs of doing this. Thus setting: • Causing inflation to rise a great deal. and the immediate effect requirement in a currency union that labour mobility play a key competitiveness adjustment role. the effective interest rate can be reduced by renegotiating the terms and conditions of the outstanding debt with the holders. pension and competition reforms will improve growth over the longer run. after allowing for the growth of the economy. The OECD favours labour market. Alternatively.Policies to deal with unsustainable debt The debt dynamics equation suggests a number dynamics There are a number of ways to deal of ways to deal with the problem of explosive debt scenarios: with the problem of explosive debt scenarios • Cutting spending and raising taxes to bring the budget balance to the point where it offsets the debt-service burden. this would benefit all European debt-service burdens. Inflation is not a policy tool for the countries As EU monetary policy is in the hands of the ECB. including consistency with currency-union constraints on fiscal policy and debt – such as those embedded in the Maastricht Treaty. By applying a haircut to the outstanding stock of debt. (b) the reform of EU pension systems. but it is not an immediate option for the crisis countries within Europe now. the possibility of initiating an inflationary concerned policy is not an option for the countries concerned. the OECD regulatory reforms that will not have an certainly favours: (a) policies to improve the functioning of labour markets.e. pension and With respect to structural reform.
At the same time. for example.7 However. This inability to subject the system to a reasonable amount of stress that would require new capital has already been surpassed by actual events.7% for the system as a whole. and individually for most of the banks’. Dexia and two large Irish banks). Both sets of fears may have some potential to impact fiscal policy (as has already been the case recently in Ireland) . This is in part due to the absence of a leverage ratio requirement in Europe. small Spanish banks. where the housing crises may have exacerbated pressures on banks. many of the 91 banks included did not generate enough write-offs or other adverse pressures to lead to actual losses. Only 7 of the 91 banks failed the test (falling below 6% Tier 1 capital). Tier 1 capital actually rises in the adverse scenario.reduce the fiscal burden on future generations. RWA of the 91 stress-tested banks amounts to only 40% of TA (and much less than this in some large systemically important EU financial institutions) More transparency about the real situation at EU banks would help allay concerns in the financial markets. EU banks systematically reduced the share of RWA to TA by a variety of techniques prior to the crisis and raised leverage commensurately to very high levels. Most of the losses (i. and (c) addressing the structure of competition within Europe and the consistency of regulations and governance for improving efficiency. the prices of bank-debt certificates in the secondary market have again begun falling. and (though to a much lesser extent) for the cajas and small Spanish/Portuguese banks The market has become increasingly concerned that banks in Ireland and Spain may require further injections of capital to offset housing-related losses that were not picked up by the stress test. excluding the sovereign shock. If capital rises as income exceeds losses. structural reform is likely to be a process the success of which will be measured in decades. entirely due to the rise in risk weights.e. the test shed virtually no light on the adequacy of capital to serve as a buffer to absorb losses. impairments to the banking book and losses to the trading book) were covered by income. a sensible capital ratio should rise. For the system as a whole. European banks are less-well capitalised than US banks. of which there have been plenty. since this was not actually tested. net losses were small (the main exceptions being the Spanish cajas. This largely reflects the procyclical features introduced in Basel II. The market tolerance for sovereign debt is unlikely to be improved by promises. Just as the financial markets are factoring in the risk of restructuring for sovereign bonds. But the Tier 1 ratio actually falls by 0. as the above marketimplied probability-of-default calculations suggest. Bank vulnerabilities and potential feedback on fiscal deficits The EU stress tests of June 2010 did not fully allay concerns about bank losses and fiscal interplay. Since the scenario is designed with a constant balance sheet assumption. which raise risk-weighted assets by EUR 824bn.9 BlundellWignall and Atkinson (2010) point out that. it is unclear what is being tested besides the sensitivity of regulatory constructs. Hypo Real Estate. the exposure of some banks in all four countries to market fears regarding a restructuring of sovereign debt would likewise require an increase in capital to act as a shock absorber. However.11This is especially the case for the Bank of Ireland and Allied Irish. left out the bulk of holdings in the banking book. while the balance sheet is otherwise unchanged. In other cases. The stress-tested sovereign shock. which applies capital requirements only to Risk-Weighted Assets (RWA) without any reference to the ratio of RWA to total assets (TA) in banks. ABN/Fortis. Royal Bank of Scotland. particularly in Ireland and Spain. where authorities instead rely on the Basel system.
this argues against such a haircut. The government has raised the capital requirements of the Bank of Ireland (BOI). Markets are concerned about the possibility that losses could be larger than these estimates due to weakening property prices. ultimately. Greek debt is at the highest level of the four countries considered. the Spanish banking system had minimum required capital of around €168bn. Market arithmetic for Ireland The Irish banking sector had minimum required capital of €51bn and actual capital of €63bn at the start of 2010. have begun to fall. while some of the smaller players may face greater difficulties. At the same time the situation is very heterogeneous. this would substantially reduce the chance of debt restructuring. this increases the likelihood of a sovereign-debt restructuring. and the market gives Greece the highest probability of a restructuring. According to the fifth criterion concerning the likelihood of sovereign-debt haircuts.8% on which the required capital is based in Table 3. This suggests on-going risk to the budget with respect to support for the banking system affecting the market assessments of restructuring via the first and second criteria above (the size of the primary deficit and debt as a share of GDP). This may be one of the reasons that the markets give this possibility a relatively low probability at present. but the exposure to sovereign debt of €61bn means that a 30% haircut would be difficult for banks to absorb. the banks’ exposure to sovereign debt is fairly small. with two large Spanish banks having a large share of the profits and less legacy nonperforming loans to deal with. discussed above. On the other hand. The official estimate for losses (in November 2010) was €85bn. This compares to the 9. and over-capitalisation of at least 12% by the end of February 2011. Estimates of bank losses for 2010 are not taken into account. In terms of criterion 5 mentioned earlier. and the banks’ operating profits aren’t large enough to cover this over any reasonable period.Market arithmetic for Spain At the start of 2010. there is a quite substantial exposure to sovereign debt – a 30% haircut on sovereign debt would add another €63bn to banks’ capital needs. EBS Building Society and Irish Life and Permanent (ILP) to a new minimum of 10. This may be one of the reasons why some banks’ bond prices. suggesting a buffer for absorbing losses of €8bn. too. At the same time. of which they suggest that about half has been recognised. Moody’s loss estimate (in November 2010) was €176bn. the bank debt instruments will need to bear some of the burden of relieving government budget pressures. This suggests that Spanish banks would need to raise more capital. in order to cover further potential losses.5% core Tier 1 capital. This suggests a capital buffer of €27bn. Allied Irish (AIB). On the fifth criterion. including commercial property – an issue that reduces transparency about the true position of banks. suggesting a buffer of €12bn. and actual capital of €195bn. . At the same time. The market probably believes that. Market arithmetic for Greece The Greek bank sector had required capital of €23bn at the start of 2010 and actual capital of €31bn.12This amount is large relative to GDP. according to market reasoning.
. Once existing equity holders are wiped out. housing related losses. bank exposures to sovereign debt are not evenly distributed:13Buiter and Rahbari (2010) have recently pointed out that average exposures to sovereign debt don’t matter: Averages give little information about specific banks’ capital needs. According to the fifth market criterion. If government guarantees are in place. It is the outlier cases that are important in assessing the risk of financial crises. which all differ widely. Bank exposure to known holdings of sovereign debt As noted in Blundell-Wignall and Slovik (2010). but bank exposure to periphery sovereign debt is small in aggregate. the full resolution of a financial institution would involve the unsecured bondholders bearing the losses and the economy experiencing the deadweight losses associated with failures. which has been working well enough via ECB operations. A run on deposits or failure to roll-over debt in the wholesale markets requires emergency liquidity lending in order to keep banks operating. A major lesson of the crisis was that failures of systemically important financial institutions led to counterparty and contagion effects that had widespread crossborder implications. If the issue is to be properly managed by policy makers it is critical to focus on individual banks.Market arithmetic for Portugal Required and actual capital positions suggest Portuguese banks have no buffer to absorb losses. The markets and bank solvency and debt options A second major concern in financial markets addressed in this paper is the uncertainty there is about how bank insolvency issues are to be dealt with and the risk that they might pose to fiscal consolidation in some countries. on fiscal grounds. But this does not deal with solvency issues resulting from losses on the assets side. particularly where bank liabilities are subject to government guarantees. inconsistent with principle 2 above (de-leveraging and activity effects). the pain is borne directly by the taxpayer instead. pre-tax income and holdings of government debt. this should increase the likelihood of restructuring in market calculations. Bank bond prices have been subject to significant moves following official discussion of these issues.
They in return. cooperative. 5 lakhs. other nationalized bank & RRB’s) and private b)foreign 2. subject to fulfillment of the following conditions laid down in Section 42(6) of the Act. having been given suitable opportunity to increase the value of paid-up capital and improve deficiencies. called a scheduled bank. Non-scheduled bank Central co-operative bank and primary credit societies Commercial banks Reserve bank of India RBI is the banker to banks—whether commercial. It must satisfy RBI that its affairs are not being conducted in a manner detrimental to the interests of its depositors.INDIAN BANKING SYSTEM Financial Structure The Indian financial system comprises the following Institutions: Reserve bank of India at apex 1. A system of local area banks announced by the . Scheduled banks State co-operative banks Commercial banks Commercial banks further divided into two categories a)Indian(public (state bank and its subsidiaries. RBI is authorized to exclude the name of any bank from the Second Schedule if the bank. primary urban cooperative banks. The relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act. goes into liquidation or ceases to carry on banking activities. enjoy the facility of financial accommodation and remittance facility at concessional from the RBI The classification of commercial banks into scheduled and non-scheduled categories that was introduced at the time of establishment of RBI in 1935 has been extended during the last two or three decades to include state cooperative banks. Such bank. or rural. 1934. Scheduled banks are require to maintain a certain amount of reserves with the RBI. as follows: It must have paid-up capital and reserve of not less than Rs. is entitled to facilities of refinance from RBI. and RRBs.
Major shares of DFHI are held by SBI. To nurture growth of private capital flows. RBI also set up in April 1988 the Discount and Finance House of India Ltd. Industrial Credit and Investment Corporation of India (ICICI) was set up in the private sector with foreign equity participation. For meeting specialized financing needs. including Life Insurance Corporation of India (LIC) and General Insurance Corporation (GIC). IDFC will work on commercial orientation.000 NBFCs operating) had deposits of Rs1. A system of registration was introduced in April 1993 for NBFCs with net owned funds (NOF) of Rs5 million or above. Specialized development financial institutions (DFIs) were established to resolve market failures in developing economies and shortage of long-term investments. 539 billion in 1995/96. creation of a Long-term debt market and best global practices on governance and risk management in infrastructure Projects NBFCs undertake a wide spectrum of activities ranging from hire purchase and leasing to pure investments. RBI regulations In India. Examples include the National Bank for Agriculture and Rural Development (NABARD). The first DFI to be established was the Industrial Finance Corporation of India (IFCI) in 1948. the Infrastructure Development Finance Company Ltd. The same year saw the founding of the first mutual fund in the country. power generation. Subsidiaries of GIC also provide substantial equity and loan assistance to the industrial sector. and Small Industries Development Bank of India (SIDBI). This was followed in 1964 by Industrial Development Bank of India (IDBI) set up as a subsidiary of RBI. rationalizing the legal and regular framework. aiming to moderate deposit mobilization in order to provide depositors with indirect protection. and ICICI. which were confined solely to deposit acceptance activities of NBFCs and did not cover their functional diversity and expanding intermediation. The Government owns insurance Companies.000 reporting NBFCs (out of more than 40. (DFHI) in partnership with SBI and other banks to deal with money market instruments and to provide liquidity to money markets by creating a secondary market for each instrument. the Unit Trust of India (UTI). IFCI. It regulated the NBFCs under the provisions of Chapter IIIB of the RBI Act of 1963. innovations in financial products. banks lending to individual is based on their income. IDFC will seek to unbundle and mitigate the risks that investors face in infrastructure and to create an efficient financial structure at institutional and project levels. More than 10. Liberalization of economic policy since 1991 has highlighted the urgent need to improve infrastructure in order to provide services of international standards. which serve as apex banks in their specified areas of responsibility and concern. RBI has given in principle clearance to five applicants. Export Import Bank of India (Exim Bank). though a mutual fund. In 1955. RBI initially limited their powers. National Housing Bank (NHB). A wide variety of financial institutions (FIs) has been established. communication. (IDFC) was set up in 1997. Infrastructure is woefully inadequate for the efficient handling of the foreign trade sector. while UTI. conducts similar operations.Government in power until 1997 has not yet taken root. The banks do religiously . This rendered the regulatory framework inadequate to control NBFCs. and was followed by SFCs at state level set up under a special statute. The RBI Working Group on Financial Companies recommended vesting RBI with more powers for more effective regulation of NBFCs. The three institutions that dominate the termlending market in providing Financial assistance to the corporate sector are IDBI. etc.
and. by their respective head offices. the Government arranged the nationalization of 14 scheduled commercial banks in order to expand the branch network. ―if you spend more than you earn.. Regional Rural Banks (RRBs): In 1975. The boards of directors and their committees hold monthly meetings while the executive committee of each central board meets every week. and another 25 per cent of their deposits in government bonds. there will be no domestic liquidity crisis because the RBI can buy back those bonds and pump rupees into the market. RBI issued market stabilization schemes and bonds and absorbed dollars. In contrast to the state bank group. you will get in trouble―. A merger reduced the number from 20 to 19. Last but not the least -Culture – Indians are not very comfortable with credit. State bank group: This consists of the State Bank of India (SBI) and Associate Banks of SBI. i.SBI has 13 head offices governed each by a board of directors under the supervision of a central Board. or public . now if overseas investors suck out dollars after selling shares. the state bank group and nationalized banks were required to sponsor and set up RRBs in partnership with individual states to provide lowcost financing and credit facilities to the rural masses. once a month). followed by six more in 1980. RBI insists the bank to keep the capital ratios within the range of 11% to 13% (Regulation is 9 %) Indian banks are not focusing on the business structure like securitization and collateralized debt obligation (CDO) – Again thanks to RBI regulations. Co-operative banks: The cooperative banks also perform basic functions of banking but differ from commercial banks in the following respects: • Commercial banks are joint-stock companies under the Companies Act of 1956. Thus. the former RBI governor (6th Sept 2003 to 5th Sept 2008). In India. The state bank group and nationalized banks are together referred to as the public sector banks (PSBs). Indians generally think. He was Y V Reddy. Mortgage loan still insists on down payment (15% to 30%) and this prevented many who dreamt of having properties completely at bank’s expense. Nationalized banks are wholly owned by the Government. He made sure that Indian banks did not get too caught up in the bubble mentality.verify an individual’s income and expenditure before sanctioning any loans. joint families still exist and family members help each other in times of economic crisis so they don’t go to banks to borrow money. there is no shortage of dollars to sell to them. Nationalized banks: In 1969. nationalized banks are centrally governed. RBI has made banks keep 7. 70% of the banks in India are still nationalized.e. although some of them have made public issues.5 per cent of their deposits in cash. The Reserve Bank of India (RBI) owns the majority share of SBI and some Associate Banks of SBI. Another crucial factor RBI had the right person in the right job at right time. So even if there were to be a run on a bank they still would have the liquidity to tackle the situation. there is only one board for each nationalized bank and meetings are less frequent (generally.
China and rest of the world. he added.Indian banking sector in general and the Reserve Bank of India were applauded post financial crisis for fiscal prudence. are applicable to cooperative banks. Italy. Japan. It does not tell the real story because world GDP is calculated based on US dollars. China ($7000B) and Japan ($4300B) in PPP terms .4 after US (America) (($13800B). Japan and China is needed to study international economy and business. resulting in only partial control by RBI of cooperative Banks. Indian GDP ranks to No. This article will help you understand better Indian markets. industries and overall growth picture of India in Comparison with US. France. Indian GDP is calculated to $3000B that is approximately 4. Indians have to buy. However. EU. India ($3000B) comes to No. consumers. Canada. Brazil and Russia. European Union . with state cooperative bank at the apex. It is also the largest democracy in the globe. It has GDP of $1100 B (2007) or RS. Germany. Canada. and primary cooperative societies at rural level. UK. India is an emerging economy and comparison of Indian economy with other countries such as the US. Spain. India is a large economy. cost efficient model. • co-operative banks have a three-tier setup. Here is a comparison of Indian economy vs. . In PPP method. • Only some of the sections of the Banking Regulation Act of 1949 (fully applicable to commercial banks). Indian banks have improved their cost to income ratio by 6 per cent on an average. China. People want to compare economies to make strategies. Canada. Price parity parameter shows comparatively better picture. sell and spend in Indian rupee. and • Cooperative banks function on the principle of cooperation and not entirely on commercial parameters.sector banks under a separate Act of the Parliament Co-operative banks were established under the Co-operative Societies Acts of different states. GDP India is fourth highest in the world in PPP terms.7 percent of world GDP of $64000B in PPP.e. Japan. the US. Japan. EU. India has particularly strong long-term growth potential. Indian banks have become more efficient due to tighter credit assessment and disbursals.55000 B. Canada. weeded out non profitable and highly risky portfolios and increased the CASA substantially resulting in lower cost of funds for the bank. Comparison Of Banking Systems India could become the third largest banking sector by 2050 after China and US.12 in nominal term of world GDP after US. central/district co-operative banks at district level. However. It is approximately two percent of the GDP of the world i. leaving Japan. China and rest of the world. $55000 B. Post downturn. UK and Germany behind. second highest in the world. India is a large country having population of more than a billion.
India is a large country having population of more than a billion. Only China has shown greater growth rate than India. It is approximately two percent of the GDP of the world i. European Union. It has GDP of $1100 B (2007) or RS. Canada. This will surely affect India and China but they can manage their growth in a positive range. UK.55000 B.India’s largest private sector bank. Indian GDP ranks to No. More over India is growing at the rate of eight to nine percent per annum whereas most of the developed countries including US. sell and spend in Indian rupee. India is a large economy. India ($3000B) comes to No.7 percent of world GDP of $64000B in PPP. However. Japan and China is needed to study international economy and business. It is also the largest democracy in the globe. Spain. In PPP method. India has achieved highest growth rate in stock market in the world. GDP India is fourth highest in the world in PPP terms.e. Japan and countries of EU and UK are growing at a very slow speed until last year. Only China has shown greater growth rate than India. Canada.4 after US (America) (($13800B).484 in 2050 from $945. $55000 B. Japan and countries of EU and UK are growing at a very slow speed until last year. India’s domestic banking assets are expected to grow to $38. Most of the developed countries have started showing tendency of negative growth. Picture is little different this year. second highest in the world. Indian GDP is calculated to $3000B that is approximately 4. France. China could overtake US in 2023 and India could overtake Japan in 2033. Brazil and Russia. Canada. India is an emerging economy and comparison of Indian economy with other countries such as the US.12 in nominal term of world GDP after US. However. China. Price parity parameter shows comparatively better picture. Indians have to buy. . owing to shift in strategy from aggressive growth to cost rationalization. Japan. If we compare the stock markets of India and America since 9/11 Highest growth in stock market More over India is growing at the rate of eight to nine percent per annum where as most of the developed countries including US. Germany. Canada. It does not tell the real story because world GDP is calculated based on US dollars. It is expected that China will manage a growth rate of eight to nine percent where as India will anywhere between seven to eight percent. China ($7000B) and Japan ($4300B) in PPP terms. ICICI Bank improved its cost to income ratio from 53 per cent in 2007 to 38 per cent in 2010. Italy.
that is a gain of 6567 points or approximately 250 percent! Hangseng is 14753 and Shanghai is 2037 today. Where as BSE India has traded at (on eighth Dec. GDP India represents the fourth largest economy in the world in price parity parameter (PPP).2008. Canada. 2008). If we compare the stock markets of India and America since 9/11. $997B. This shows that Foreign currency reserve of India was the fifth highest in the world after that of China.2001). As I do not have actual data of 21st Sept. Composite economic scenario of India: GDP India is twelfth largest economy in the world in nominal parameter but that does not show the real picture. $282 B and $247 B respectively in 2007. Japan. India has the second highest growth rate in the world after China. France and the UK are not in this list. This will surely affect India and China but they can manage their growth in a positive range. Taiwan and Russia. 9th market closed) 9162 level. India has achieved highest growth rate in stock market in the world. Fifth highest foreign currency reserve in the world India has fifth highest foreign currency reserve in the world. 09. It is worth mention that so called rich countries likes of the US. Dow Jones is trading at 8787 (While writing this hub Dec.Picture is little different this year. It is expected that China will manage a growth rate of eight to nine percent where as India will anywhere between seven to eight percent. Taiwan and India were $ 1905. Japan. Russia. it has gained mere 550 points over the period of more than seven years. of both these indexes it is not justified to calculate the gain but it is some thing around thirty to fifty percent. please inform me) but those were around 1400 and 11000 respectively. . Particular data for Shanghai (China) and Hangseng (Hong Kong) are not available to me (If anyone has the data. Dow Jones fell after 9/11 to 8235 on 21st September 2001. 9 of Japan and below 3 percent of Taiwan on year-to-year basis. $485B. Dow has increased mere six percent in more than seven years and China and Hong Kong index has raised by thirty to fifty percent (roughly estimated) but Indian stock exchange index BSE has shown an amazing growth of more than two hundred fifty percent. If we compare it with the previous Dow Jones data (21st sept. Foreign currency reserves of China. The BSE (India) also fell during those days to reach a low of 2595. we find fascinating facts. Most of the developed countries have started showing tendency of negative growth. It has jumped from 2595 to 9162. The most interesting fact is that Indian foreign currency reserve had been increased 64 percent in comparison to 32 percent of China and 57 of Russia.
American banks. There is good reason to believe that inflation is harmful even at what one Might consider relatively moderate rates—annual rates of perhaps 5 to 10 percent. lent on it without any hesitation.BSE stock index of India has grown at the fastest pace beating all stock indexes in the world including America. Now banks have understood this and made some changes. China. while excellent on paper. India continues to be an attractive place for investment. all stock markets in European Union.1 growth rate among stock markets in the world. The Impact of Inflation on Bank Lending By now. Indian banks are in a strong position as the ratio between lending and deposit is vast in India. Now after this Financial Tsunami RBI has reduced the CRR hike and there by more funds into the market and asked the bankers to . Canada. Japan and of course. Naturally the banks liquidity will be affected and they have to make money only with the limited source available with them. till the recession. there by price rice can be controlled. The Indian financial system has been witnessing an exciting era of transformation. RBI has increased the CRR rates. Hyperinflations—when inflation rates are extremely high—are the horror stories. Can we now stop worrying about inflation? Probably not. But now. everybody knows inflation is bad. there is some evidence of credit constraints for India’s SME firms that rely heavily on trade credit. While for American economy. there are changes in bank regulations along with restructuring in lending. The banking sector has seen major changes with deregulation of interest rates and the emergence of strong domestic private players as well as foreign banks. Indian Bank system is in a better position and more stable. central banks around the world have been pretty successful at dramatically lowering inflation rates. On the other hand. American banks used to believe that real estate sector never goes down and thus. In the last few years microfinance has contributed in a big way to financial inclusion and is now attracting venture capital and for-profit companies – both domestic and foreign. The growth rates of the country will about five percent which is higher than America. At the same time. Over the past several decades. which means withdrawal of more free flow of funds from the banking sector and their lending source of funds come down. but few doubt the harmful effects of inflation rates in the teens either. gave loan to the people even with zero income. Corporate governance norms in India have strengthened rapidly in the past few years. Agriculture is one of the factors. which will help survive during slow down. but next year onwards. Compared to America. still dominate the landscape and investor protection. but they were wrong. Effect on Banking sector Because of high inflation. India has no. it will be a good time. appears to be less effective owing to an overburdened legal system and corruption. however. Family businesses. this year will be quite disturbing.
regulations. Obstacles can also arise from the actions of banks themselves. And in those countries with governmentimposed usury laws or interest rate ceilings. Incidentally. For each country. The story goes something like this. One way inflation might affect economic growth through the banking sector is by reducing the overall amount of credit that is available to businesses. Lower real rates of return discourage saving but encourage borrowing. we looked at data for around 100 countries (full details of the study appear in Boyd and Champ 2003). the result is lower investment in the economy. lowers real economic activity. we averaged data on a number of economic variables across various time periods in the 1980s and 1990s. Averaging across a long time horizon gives us some notion of the long-run effects of inflation. Simply charging a higher nominal interest rate on loans merely makes the problem worse because it causes low-risk borrowers to exit the market. Only when inflation rises above some critical level does rationing occur. when financial intermediaries ration credit in this way. higher inflation might actually lead to increased real economic activity. In smoothly operating credit markets. Government ceilings on interest rates are an example of such an obstacle. policies. Whatever the cause. increasing the nominal interest rate may not be possible. With lower investment. Banks may react to the combined effects of lower real returns on their loans and the influx of riskier borrowers by rationing credit. That is. or they may at least restrict the quantity of loans made. new borrowers entering the market are likely to be of lesser quality and are more likely to default on their loans. To test these hypotheses empirically. This beneficial outcome can occur only in countries where inflation and nominal real returns on assets. But there is something peculiar about the effect of inflation on the financial sector: It appears to have important thresholds. banks can easily adjust nominal interest rates when they need to. inflation does not cause credit rationing. This implies that beneath some thresh-old.lend more money to mutual funds and there by save the falling share prices because of heavy selling from FIIs ■ Theoretical Insights into Inflation A key insight of the recent theories is that inflation exacerbates so-called frictions in credit markets. if banks find it difficult to differentiate between good and bad borrowers. Since empirical studies have shown that credit market frictions are more severe in developing countries than developed countries. This. but frictions create obstacles that make this adjustment difficult. . At very low rates of inflation. they may refuse to make loans. when they respond in the best possible way to the incentives and risks that are created by existing laws. in turn. At this point. Higher inflation can decrease the real rate of return on assets. and economic conditions. these frictions may play an important role in explaining the impact inflation has on economic growth in these countries. the present and future productivity of the economy tends to suffer.
Many people might be surprised that such a ―small‖ rate of . We break the cross-country data into quartiles.8 percent to 85. the sample period is 1980–95. Prior studies looked at episodes in which average inflation was consider-ably higher. we present the median and mean values of the banking sector size measure for each of the inflation quartiles. and the median inflation rate in the second quartile is only 6. Moreover. but they yielded similar results to ours. Below each quartile group.9 percent.the time period we looked at is not one of particularly high world-wide inflation: The median inflation rate was around 8 percent across all our sam-ples. and the highest inflation quartile contains countries with inflation rates in excess of 17. inflation affects bank lending even at relatively low inflation rates—the median ratio of bank lending to GDP in the second quartile is 10 percent smaller than in the first quartile. In figure 1.4 percent. the range of the inflation rate for each of the quartiles is listed. The first quartile includes those countries with average inflation in the lowest 25 percent of the sample.4 percent. For example. Figure 1 shows one measure of bank lending in an economy—total bank lending to the private sector as a ratio to GDP. which is consistent with he view that a sufficiently high rate of inflation induces banks to ration credit. This effect suggests that inflation reduces bank lending to the private sector.6 percent. For this analysis. The fourth quartile includes those countries with the highest inflation averages. the lowest inflation quartile covers inflation rates less than 5.5 percent. The Impact of Inflation on Bank Lending Several economists have found that countries with high inflation rates have inefficiently small banking sectors and equity markets. with inflation rates ranging from 0. The median inflation rate is 8. This finding also holds for the data we examined. We see that the amount of bank lending declines with inflation.
real treasury bill rates. We would expect banks to adjust their nominal rates to account for inflation. the real net interest margin turns negative. a one percentage point increase in inflation is associated with a one percentage point decline in the ratio of bank lending to GDP. The impact of inflation on real rates is most evident at the extreme. The economies in our highest-inflation quartile experienced real money market rates and real treasury bill rates of around zero percent on average during the time period studied. rate of return on equity. after controlling for other variables. (The real net interest margin is a measure of the inflation-adjusted spread between a bank’s lending rate and its cost of obtaining funds. inflation does appear to have a negative impact on bank profitability measures. we find that inflation has a dramatic negative impact on the profitability of banks. The one example where we don’t find what we might expect is with nominal interest rates on bank loans. At the highest inflation quartile. We find that inflation is negatively associated with real money market rates. such as the ratio of total bank assets to GDP or the ratio of the liquid liabilities of the financial sector to GDP. In fact. Figure 2 plots banks’ real net interest margins against the inflation quartiles to give one example. We uncover substantial evidence for this effect in the data. However. but over longer periods. net profits.1 percent. at the median inflation rate. Other studies have found similar effects of inflation on alternative measures of banking sector size. the real rate of return on these instruments falls. with the ratio of bank lending to GDP only 15 percent Although suggestive. The real time deposit rate for the high-inflation countries was approximately –3 percent.) We find no significant statistical relationship between inflation and the real bank loan rate. However. and value added by the banking sector—all decline in real terms as inflation rises. Negative real interest rates provide little incentive for saving. as we detail later. such a simple graph does not take into account other factors that can affect the size of the banking sector. Such low real rates of return suggest that the incentives to expand bank operations simply are not as strong as inflation rises. (One might not expect nominal rates to rise one for one with inflation over a short period of time. after controlling for other variables (in a multivariate statistical analysis). .) We see that even at fairly modest inflation rates of between 5.1 percent and 9. The chain begins when high inflation lowers the real return on assets.inflation could cause such a fall in credit. as inflation increases. but not complete support. as savers actually lose purchasing power. we still find a statistically significant negative relationship between inflation and banking sector size. The Impact of Inflation on Asset Returns and Bank Profitability inflation in sufficiently high doses kicks off a chain of events that ultimately leads to stunted economic growth. Perhaps most importantly. since banks might not be immediately aware that inflation has stepped up. it should be evident. and real time-deposit rates. the effect is dramatic. Various measures of bank profitability—net interest margins. that is.
which in the U. The reserve ratio affects the money supply in a country.RESERVE RATIO The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. In the United States. with the amount of those items in the institution's balance sheets. although banks will have their own internal measures and targets to be able to repay customer deposits as they forecast they will be required. specified percentages of deposits—established by the Federal Reserve Board—must be kept by banks in a non-interest-bearing account at one of the twelve Federal Reserve Banks located throughout the country.S. set by the European Central Bank. the reserve requirement of an institution is calculated by multiplying the reserve ratio for each category of items in the reserve base. is the Federal Reserve. This is a requirement determined by the country's central bank. Reserve Requirements . In the United Kingdom and in certain European countries. and depends on the amount of checkable deposits a bank holds. These figures vary according to the institution. there is no compulsory ratio. In Europe. The required reserve ratio in the United States is set by federal law. in India by Central Bank.
50% which was continuing since 24/04/2010 Statutory Liquidity Ratio (SLR) 24%(w.Requirement Liability Type % of liabilities Net transaction accounts 1 $0 to $11.f. In india.5 million2 More than $11.00% to 5. No reserves are required against certificates of deposit or savings accounts. The reserve ratio requirement limits a bank's lending to a certain fraction of its demand deposits.0 million3 More than $71.0 million Nonpersonal time deposits Eurocurrency liabilities 0 3 10 0 0 12-29-11 12-29-11 12-29-11 12-27-90 12-27-90 Effective date These breakpoints are reviewed annually in accordance with money supply growth. Reserve ratio is decided by RBI and revised gradually. The reserves can be held in any combination of till money and deposit at a Federal Reserve Bank. 18/12/2010) continuing since 07/11/2009 Decreased Decreased from 25% which was Challenges and Opportunities for Indian Banking Industry .50% (wef 28/01/2012) -announced on 24/01/2012 from 6.5 million to $71. Cash Reserve Ratio (CRR 5. The current rule allows a bank to issue loans in an amount equal to 90% of such deposits. holding 10% in reserve.e.
During the recessionary phase between October 2008 to March 2009. These require new skills in sales & marketing. The country’s middle class accounts for over 32 crore people. both repo and reverse repo and provide liquidity to the economy by reducing the reserve ratios and offering adequate support to the banking system. middle class. Banks are targeting to open new branches in Tier 2 & 3 cities along with opening new branches in rural areas to penetrate this market. consumers will increasingly demand enhanced institutional capabilities and service levels from banks. ―Going Rural‖ could be the new market mantra. The manpower shortage is really a big worry for the banking industry and to retain existing employees is also a big challenge. The banking sector is seeing constant growth driven by new products and services that include opportunities in credit cards. The structure of Indian Banking industry is different than USA. we follow Bessel 2 norms and all the Indian banks maintain all the CAMELS ratios better than the benchmark Bessel 2 norms. credit and operations. to attract technically sophisticated customer segment. private players were allowed to enter and this step transformed the structure of Indian banking system. as a bank’s point of view it is good because the operational costs is going down. Now the point of contact is reducing and Banks are taking this challenge as an opportunity. through its innovative products. and technological innovations are all contributing to this growth. . Their aim is to offer products to each and every segment of customers. We are having instrument like SLR which is not being used in USA. given the demographic shifts resulting from changes in age profile and household income. E-Remit. In correlation with the growth of the economy. the RBI reduced the policy rates. rising income levels. Due to strict regulations. Perhaps this extra security feature makes our system strong. and in fee-based income and investment banking on the wholesale banking side.Indian Banking industry was deregulated since 1994. Washington Mutual etc collapsed. consumer finance and wealth management on the retail side. internet banking. Banks are now offering new technologically sophisticated products like Mobile Banking. But better HR policies and chances of better growth in Banking industry are attracting the youths. tighter norms on capital adequacy and close watch by the Reserve Bank of India (RBI) prevented the severe impact of the global financial crisis to the Indian banking system. 41% of Middle class and 58% of disposable income. Rural market comprises 74% of the population. This segment of customers prefer to do banking from their workplace or home only. Second. The Indian Banking system has successfully managed the financial tornado due to sound policies of our central bank and fiscal stimulus packages implemented by the Government. The banking system is reorienting its approach to rural lending. and affordability of banking products are promising factors for continued expansion. An expanding economy. he Indian banking market is growing at an astonishing rate. Since 1994 world has seen two major financial crises including the subprime crisis due to which giant like Lehman Brothers. with Assets expected to reach US$1 trillion by 2010. increased standard of living. Specialised branches are being opened to target the niche like overseas branches or Corporate branches.
JPMorgan Chase & Co.Although due to competition created by Private and Foreign banks government banks initially faced tough competition but their core competency is trust of our customers which make us different than others . (JPM). known as the GIIPS. ―Unless the euro zone debt crisis is resolved in a timely and orderly manner. Ireland. without explaining what it meant by contagion. Bank of America Corp.S.‖ the New York-based rating company said yesterday in a statement.S. banks have ―manageable‖ exposure to stressed European markets. lenders to major European banks and the stressed nations of Greece. the broad credit outlook for the U. and Morgan Stanley .S. After the deregulation in banking industry the level of service has been improved and in long run the future of Indian banking industry is good.S. ―further contagion poses a serious risk. NEWS ARTICLES 1 ) U. Banks Face Contagion Risk From Europe Debt U. banking industry could worsen. Even as U. Italy. So their brand equity is RELATIONSHIP with their customers and now with prompt and efficient services these government banks are making long lasting relationship with their customers.as a government banks they have some corporate social responsibility so unlike private players they not only think about the profitability but also our responsibility. banks -. (C). (WFC). The ―exposures‖ of U.‖ Fitch said. are smaller than those to some of the continent’s larger countries. banks face a ―serious risk‖ that their creditworthiness will deteriorate if Europe’s debt crisis deepens and spreads beyond the five most-troubled nations.S. Portugal and Spain. Fitch said. Goldman Sachs Group Inc.S. The six biggest U. Wells Fargo & Co. Citigroup Inc. Fitch Ratings said. (BAC).
stocks slumped yesterday after the Fitch report was released. Risk to Britain and its banks was $225 billion and $51 billion. Europe’s debt crisis has toppled four elected governments. The gap between the London interbank offered rate and the overnight index swap. the difference between what lenders and the U. Relative Safety Investor demand for the relative safety of Treasuries during the European debt crisis has sent the difference between U. dropped amid concern they’ll need more capital.and shares of French banks. analysts at HSBC Holdings Plc said today. Italian bond yields remained at about 7 percent -. Portugal and Ireland to seek bailouts -. Fitch said. the most since August 2009. banks may even benefit as investors shift money from Europe. The Standard & Poor’s 500 Index slid 1. five-year swap spreads climbed to 45 basis points. with the S&P benchmark dropping 1.47 percentage point. the most since June . respectively. with the last two. or what traders expect the Federal Reserve’s benchmark to be over the term of the contract. Stocks Slump U. The Fitch report is a worst-case scenario and is ―oddly out of step‖ with the rating firm’s previous reports. in New York. Ratings on the U.7 percent and the 24-company KBW Bank Index fell 1. Investors use swaps to exchange fixed and floating interest rates.m. widened to 47 basis points today.S. HSBC said. or 0. banking industry are stable and take into account lenders’ improved capital and liquidity position. is a measure of bank creditworthiness. including $114 billion to French banks. the highest level since June 2009. falling last week. Fitch said.S. stock declines continued today.the threshold that led Greece.S.S.S. 30. including BNP Paribas (BNP) SA and Societe Generale (GLE) SA. the gap between the fixed component and the yield on similar-maturity Treasuries. according to the report. in Greece and Italy. short-term yields and bank rates surging to levels not seen in more than two years.(MS) -.8 percent at 12:41 p. The rating company’s assumption is that ―euro zone sovereign debt concerns will be dealt with in an orderly fashion‖ and that a disorderly restructuring of sovereign debt or the ―forced exit‖ of a nation from the euro will not occur. widened to 38 basis points today.S.9 percent. U. TED Spread The TED spread. U. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion. government pay to borrow for three months.S. U.had $50 billion in risk tied to the GIIPS on Sept. The spread.
economy was in a recession. The top five U. and ensure that the latter become fully credible. Ireland. according to the Bank for International Settlements. new head of the European Central Bank. Guarantees provided by U. Fitch said. citing its assumption that ―there is now a lower likelihood‖ that the lenders would get external support. giving only net numbers or excluding some derivatives altogether.S. banks had $22 billion in hedges tied to stressed markets.S. according to Fitch. Moody’s Investors Service downgraded the senior debt and deposit ratings of 10 German public-sector banks.S. The TED spread was as wide as 4. Mario Draghi. Portugal and Spain rose by $80. banks’ risk. " What are those other elements? Euro zone wide political institutions that have the ability to set fiscal policy.. . Fitch said in the report. individually and collectively. In any case. Fitch said.S. bank and corporate debt in Greece. Disclosure practices also make it difficult to gauge U. Or maybe they don't. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in the event of a European default. While U.7 billion to $518 billion in the first half of 2011. two of Europe's most important central bankers spoke to the press today and they had some very interesting things to say.S. U. if the euro is to survive.. making his maiden speech before the European Parliament. people listen. Italy. Forgive me for quoting at length: "What I believe our economic and monetary union needs is a new fiscal compact .2010." This is as close as Draghi could get to stating the obvious. That much was clear by a point the ECB chief added a minute later. lenders on government. tax policies will have to be set at euro zone level. banks that run money-market funds may face additional risk if the funds suffer losses on European debt and the lenders are forced to offer support.. Also yesterday. 2) The euro zone: the central bankers' latest view on the crisis When Central Bankers talk. banks have hedged some of their risk with credit-default swaps. Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far. not at national level. those may not be effective if voluntary debt forgiveness becomes ―more prevalent‖ and the insurance provisions of the instruments aren’t triggered.64 percentage points in October 2008 when credit markets froze and the U. First.S. "Other elements might follow ..
it's not up there with.Draghi concluded. "Maybe it (the euro zone) won't breakup. What started with subprime mortgage losses in 2007 is now growing into a full-blown financial crisis. Where is it leading? Global financial stability has been shaken and America is facing a growing economic crisis that could make the 1930s look like ―good times. with hundreds of billions more forecasted. King was speaking at a press conference to present the latest analysis of the bank's Financial Stability Board. had 4.. But clearly Draghi sees where the solution to the euro zone crisis lies. The question is whether the currency can survive the short term assault by the bond markets on its individual members sovereign debt." He also urged the country's private banks to begin making contingency plans to build up cash reserves . King acknowledged that the bank was making contingency plans for the breakup of the euro zone. as they say. banking system is on the verge of disaster. Simply put. CASE STUDY The intensifying American banking crisis threatens the stability of its economy and the world’s.200 . but that is probably because the central banks . These institutions are holding an awful lot of iffy sovereign national debt.including the Federal Reserve . Consider just one example. (pop. Governor of the Bank of England.‖ The U. maybe it will continue in various forms but maybe there will still be questions of default. Describing the situation. and something else walks. nobody knows. as banks have recorded over $100 billion in losses. thus framing expectations. the answer to that question is. "A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. According to Sir Mervyn King." or any of Alexander Hamilton's more forceful contributions to the Federalist Papers.showed yesterday they were willing to provide a backstop for the banking system. "We the People of the United States. As of January 2008. it is a solvency crisis. America’s banks are staring into a financial abyss.. 280. in order to form a more perfect union." He was referring to yesterday's coordinated intervention by central banks around the world to prop up Europe's beleaguered retail banks. Calif.000). None of us really know.S. It would also present a clear trajectory for the future evolution of the euro area. Stockton. Money talks." Okay. King came up with the sound bite of the week: "It is not a liquidity crisis.including not paying out massive bonuses to its top executives! Who is listening to all this? As I write markets seem to be doing better .
The stability of the global economy is at stake. while staying financially sound. and the threat of rising inflation are rapidly weakening America’s economy. in an effort to prevent total collapse. Stockton-like scenarios are playing out. They were rescued by life-saving injections of $6. adequate assets. banks were liable to depositors for payment—the banks held the risk ―on the books. One of the world’s largest insurance companies. The losses are not confined to banks alone. French and British banks have suffered billions of dollars in losses. the 1990s saw banks . At a meeting of the G7 finance leaders. It was therefore in a bank’s best interest to carefully screen customers’ ability to repay before providing loans. Banks are busy auctioning off houses at ―fire sale‖ prices. and was required to make a sizable down-payment. the collapsing housing market. This conservative approach to lending enabled banks to make tidy profits for decades. The difference between the interest rate paid on deposits and the higher one charged on loans (the ―spread‖) was their profit. The crisis threatens to engulf banks and other financial institutions. recently reported losses from the mortgage crisis of up to $5 billion—up from a previous estimate of $2 billion. Once proud banking titans Merrill Lynch and Citigroup had to look to investments from Asian and Middle Eastern governments (through ―Sovereign-Wealth Funds‖) to shore up their balance sheets. Prices of homes in the city have dropped as much as 70%. Modern Banking Banks traditionally operated by taking deposits from their customers and lending money to those seeking loans. If customers defaulted on their loans. mutual funds and insurance companies.S. including stimulus plans. ranked 16th worldwide). tax rebates and interest rate freezes. Stockton has gone from being one of the hottest real estate markets to the foreclosure capital of America.4 billion. In many of the nation’s cities. This may be a sign of coming reassessments by others as the crisis intensifies. American International Group. However.homes in default or foreclosure.5 billion. Bush and the Federal Reserve (the Fed) have implemented unprecedented emergency measures. German. with bad loans totaling a staggering $1. respectively. increasing energy prices. According to CBS News. Treasury Secretary Hank Paulson described it as ―challenging and uncertain. Highlighting the gravity of the economic situation. U. Traditional vs. The customer needed to have a good job.‖ 100% their responsibility. European banks have also been affected.‖ A deadly combination of the credit crunch.6 billion and $14. The situation is so grave that President George W. affecting pension funds. as Swiss. towns and smaller communities. German Finance Minister Peer Steinbrueck stated that the G7 feared losses from the subprime mortgages could reach as high as $400 billion (nearly as large as the entire economy of Holland. And the news keeps growing worse.
and were rated as safe investments by the rating agencies (i. ―subprime‖ customers) were now targeted as a lucrative source of income.S. Reckless Lending In their quest for higher profits. and were paid handsomely for their efforts. Banks did not make a profit through the ―spread‖ anymore. financial services industry with the 1999 repeal of the Glass-Steagall Act.. combining these three . With the repeal of GlassSteagall. Bernanke called for an urgent reform of Social Security and Medicare. Standard & Poor’s. banks made much higher profits than ever before. no job and no assets (so-called NINJA loans). even thousands. insurance companies and other banks. The first was deregulation of the U. Carefully crafted during the Great Depression to control speculation in the stock market. such as pension funds. Moody’s. after years of lobbying by the banks. Since the loans were now ―off the books‖ and insured. 2006).e. Those who initiated the loans and approved them were no longer attached to the risk. warning that failure to do so soon could lead to dire economic consequences for future generations. Loans were provided to people with no income.The subprime mortgage market became a ticking bomb. Seeking higher and higher profits to satisfy shareholders and to secure executive performance-pay bonuses.. mutual funds. now owned by other investors. insurance companies and investment banks from owning each other. Two developments have played a significant role in the development of modern banking and the current crisis. Further. of mortgages into bonds and then sell the bonds to investors.‖ a process that allows banks to convert hundreds. To do this. the banks felt comfortable about ―originating‖ even more loans. and Fitch). ready to explode at any time. but instead made a fee for having put together (―originated‖) the loan. they used other people’s money through ―securitization.e. 4. such as no down payment required and interest-only payments. and marketed aggressively to. Enter the Fed: Expand Image Thinking ahead: Federal Reserve Chairman Ben Bernanke discusses ―Savings‖ during an Economics Club of Washington luncheon (Oct.Additional ―sweetener‖ incentives were also provided. as they once did. banks no longer felt the need to carefully screen loan applicants. banks decided they could make even higher profits if they loaned out more money. Glass-Steagall prevented retail banks. Customers who did not qualify for loans under the banks’ standard lending procedures (i. the bonds were insured by specialized insurance companies (so-called ―monoline‖ insurers). massive financial services conglomerates were suddenly formed.change their traditional way of operating. Mr. Through their new fee-based income.
customers took the bait believing they could refinance their homes at an affordable rate when the time for the reset arrived. With substantial increases in real estate prices occurring every year. housing prices fell moderately—tipping the scales. Crisis Strikes The crisis started in the summer of 2007. the first batch of interest rate resets came due. Industry behemoths such as Citigroup and JP Morgan quickly came into being.‖ At a meeting in Toronto. They feel that while this hurts their credit rating. Sometimes banks did not even bother to check the information provided. rated risky bonds (those with subprime components) as safe—even giving them the highest rating. in the short-term it hurts less than the downward spiral toward bankruptcy. which led to disastrous consequences during the Stock Market Crash of 1929. ―Predatory lending‖ was compounded by ―predatory borrowing‖! Banks sold risky bonds as safe investments to unsuspecting investors. many customers defaulted on their loans. Rating agencies. ―It’s sort of a little poetic justice. Banks offered initially low interest rates (―teaser‖ rates). mortgage brokers misrepresented terms and conditions to eager customers who provided them with fraudulent information.‖ In their greed.‖ as so many homeowners are just turning in their keys. paid by the banks. and an inability to refinance their mortgages.types of financial institutions. builders went on a building spree around the nation. Because of rising house prices. Many feel no moral obligation to fulfill what they promised to repay. Low interest rates encouraged banks to target subprime customers with variable rate mortgages. Confronted with higher monthly payments on mortgages that are greater than the value of their homes. billionaire investor Warren Buffet commented. many were ―scamming the system. homeowners are abandoning their mortgages. believing it is better to walk away from their homes. Canada. to be increased two or three years later. The second was the low interest rate policy pursued by the Federal Reserve. This created a sense of ―easy money‖—―something for nothing. Due to the surplus of homes on the market. A Culture of Greed In many cases. falling house prices. in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end‖ (Reuters). Faced with exploding monthly payments. This meant that retail banks seeking higher and higher profits could now dive headlong into high-risk speculative ventures through ownership of (or being owned by) investment banks. Also around this time. . Lenders call it ―jingle mail.
Vallejo’s current liability for already earned retiree benefits of retired and active city employees is $135 million. ―It’s not a question of whether it is right or wrong for employees to give up anything. and electrical worker funding by 8%. meaning the unions are not legally required to negotiate. Being the first city in California to declare Chapter 9 bankruptcy means there is no template or previous case to predict what this would do to the city. with another $6 million being accrued per year. the banks’ fee income has dried up—leaving them with massive deficiencies in capital. Though there are many causes of the city’s financial problems. Current labor pacts are in force until 2010.‖ said Councilwoman Joanne Shivley (Times-Herald).000. And everyone is on the hook. forcing many firefighters to work overtime. Similar cuts have been proposed before to ebb Vallejo’s overspending but have always been voted against by the unions. 17% of general funds positions would be cut. This is totally a question of survival of the city. or even $200. The emergency plan includes cutting city salaries 5% by June 30. During the past years. the fire department proves to be a prime example of the budgeting troubles. Overall. leery of poor investments. meaning Vallejo must spend an additional $4 million in buyout costs. ―teetering on the edge of bankruptcy‖ (Associated Press). With the morals and values of the nation disintegrating. However. the spending cuts must be approved by unions of these groups. with most cuts coming from city-funded jobs. a year.000. many lack the character and fiscal responsibility of previous generations. more than 14 fire employees retired. his estimate for insolvency was late April 2008. Further. Vallejo may soon run out of funds. Contracts for public safety jobs such as police officers and firefighters make up 80% of the city’s general fund budget. Calif. 2008. requiring layoffs.8 million deficit for the next fiscal year. reducing firefighter and police officer salaries by 15%. The city.This change in attitude is in stark contrast to years ago when borrowers felt a moral duty to pay off their loans. Thus. ―Monoline‖ insurance companies have suddenly become liable for multiple billions of dollars of debt. The City Council has drawn up an emergency plan that would cut $20 million from the current budget. as City Councilwoman Stephanie Gomes called it. Crisis Spreads As the crisis intensifies. population 126. mortgage defaults are multiplying. is deep in a financial crisis. An American City at the Edge of Bankruptcy Vallejo.000. Years of overspending have left the city. Investors have been left holding bonds that may never be repaid. faces an immediate $10 million general fund cash shortage and almost a $13. Banks are finding it difficult to sell additional bonds as investors have backed out of the market. with some making $100. upon hearing the city was in dire financial straits. City Manager Joseph Tanner said in a report to the City Council that without a compromise with the unions. .. the fire department has suffered from staff shortages.
for security and investment. And municipal bonds (used to fund cities. While accepting foreign currency has been the norm along the Canadian and Mexican border.As credit problems mount. it will hasten the demise of the U.S. as the banking crisis further deteriorates: ―If everyone does the same thing it won’t be any more effective. theFinancial Times noted. a group of bankers were unable to back $14 billion of debt to finance an entertainment company. In its Jan. as the world’s financial leader. and America will be replaced as the financial engine of the world by a .‖ If this happens. fearful the loans will not be repaid (the ―credit crunch‖). During the G7 meeting mentioned earlier. economy. as liquidity dries up and less money is available to finance commercial loans. causing the crisis to spiral out of control? Recent news spotlighted a trend in New York that was unimaginable just a few years ago: Some shops are now accepting Euros for payment of merchandise. banks have sharply reduced lending to each other and the public. As more and more loans arrive at interest rate resets. looks poised to lose its mantle as the world’s dominant financial market because of a rapid rise in the depth and maturity of markets in Europe. There are indications that this has already begun. not least because the U. This distrust of American capital is just the tip of the iceberg. ―The U. colleges and hospitals). U.‖ In the near future. The change may have occurred already. banks received massive infusions of capital from Asian and Middle Eastern sources that are purchasing larger stakes in America’s largest bank institutions. Time will tell if the ongoing financial irresponsibility of America will cause the world ―to do what is best for its own particular situation. 15 issue. The credit crunch has pushed beyond retail banking.S.S. accepting it in the financial capital of the world is a sign of a weakening U.‖ The American banking crisis shows the vulnerability of the global economic system.S. Other major deals in the tens of billions are now in jeopardy. Toshihiko Fukui. Recently. a study suggests. according to research by McKinsey Global Institute. deepening the crisis. Each country needs to do what is best for its own particular situation. as people and nations are learning there are alternatives to the U.S. which were once considered safe investments. markets are beset by credit woes. more defaults will occur. Evidence of this is clear. can no longer readily find buyers. made a statement that could have serious ramifications. The world is looking for an alternate. it is now affecting major business deals and even commercial real estate. governor of the Bank of Japan. will countries that have so often supported America financially stop doing so.S. America’s banks have been forced to look to other nations for capital. Recently. A financial tsunami is rapidly approaching America’s shores! Kings Become Beggars Increasingly. Shockwaves from the crisis are also being felt in other sectors of the economy. Deutsche Bank had to repossess some Manhattan buildings because a well-known developer was unable to refinance $7 billion of debt.
000.8 million deficit for the next fiscal year. faces an immediate $10 million general fund cash shortage and almost a $13. Davis told local television station NBC11. is deep in a financial crisis. ―teetering on the edge of bankruptcy‖ (Associated Press).‖ The City Council has drawn up an emergency plan that would cut $20 million from the current budget. more than 14 fire employees retired. with some making $100. requiring layoffs. Mayor Osby Davis downplayed the option of bankruptcy. Years of overspending have left the city. 17% of general funds positions would be cut. From individuals to businesses to government bodies. and electrical worker funding by 8%. the fire department has suffered from staff shortages. with another $6 million being accrued per year. with most cuts coming from city-funded jobs. The city. reducing firefighter and police officer salaries by 15%.000. the fire department proves to be a prime example of the budgeting troubles. During the past years. However. Though there are many causes of the city’s financial problems. Calif.. Instead of being rooted in greed and corruption.The good news is that a new—and far superior!—global economy will one day be established. ―I like to look on the positive side. the spending cuts must be approved by unions of these groups. ―I’m confident we’re going to be able to work this out without having to file bankruptcy.superpower soon to arise in Europe. small and great—will be based on outgoing concern for others.000. meaning the unions are not legally required to negotiate. a year. Similar cuts have been proposed before to ebb Vallejo’s overspending but have always been voted against by the unions. Vallejo’s current liability for already earned retiree benefits of retired and active city employees is $135 million. Vallejo may soon run out of funds. Contracts for public safety jobs such as police officers and firefighters make up 80% of the city’s general fund budget. 2008. population 126. all will practice fiscal responsibility during the soon-coming age the Bible refers to as ―the world to come‖ An American City at the Edge of Bankruptcy Vallejo. Overall. It’s not an alternative we want the public to believe we’re moving toward with any intention. this future worldwide financial system—which will benefit every nation.‖ Mr. forcing many firefighters to work overtime. as City Councilwoman Stephanie Gomes called it. or even $200. upon hearing the city was in dire financial straits. The emergency plan includes cutting city salaries 5% by June 30. Further. refusing to call it the only possibility and promising to look to other solutions. . Current labor pacts are in force until 2010. meaning Vallejo must spend an additional $4 million in buyout costs.
‖ . City Manager Joseph Tanner said in a report to the City Council that without a compromise with the unions. This is totally a question of survival of the city. ―Anything other than totally new contracts is a BandAid. his estimate for insolvency was late April 2008.‖ She continued. Councilwoman Shivley told NBC11 that the cuts being ―purposed in order to remain solvent will decimate city services. The city now waits for the decision of four main unions or it will quickly run out of options.―It’s not a question of whether it is right or wrong for employees to give up anything.‖ said Councilwoman Joanne Shivley (Times-Herald). Being the first city in California to declare Chapter 9 bankruptcy means there is no template or previous case to predict what this would do to the city.