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Impact of Financial Crisis on Indian Banking and
Strategies in dealing with the Crisis
India China Financial Conference
10th November 2009
Mumbai
Rajiv Kumar
1
Structure of Presentation
• Global Crisis and India
• India’s Policy Response
• Assessment of Policy Response
• Potential Measures for Reigniting Growth
2
Rapidly Changing Global Economic
Outlook, IMF Growth Projections
GDP Estimates for 2009
GDP Estimates for 2009
Jul,
2008
Nov,
2008
Jan,
2009
Apr,
2009
Jul,
2009
Oct,
2009
Jan,
2009
Apr,
2009
Jul,
2009
Oct,
2009
USA
0.8
-0.7
-1.6
-2.7
-2.6
-2.7
1.1
-0
0.8
1.5
UK
1.7
-1.3
-2.8
-4
-4.2
-4.4
0.2
-0.4
0.2
0.9
Germany
1.0
-0.8
-2.5
-5
-6.2
-5.3
0.1
-1
-0.6
0.3
Japan
1.5
-0.2
-2.6
-6.1
-6
-5.4
0.6
0.5
1.7
1.7
France
1.4
-0.5
-1.9
-2.9
-3
-2.4
0.7
0.4
0.4
0.9
Canada
1.9
0.3
-1.2
-2.5
-2.3
-2.5
1.6
1.1
1.6
2.1
Italy
0.5
-0.6
-2.1
-4.4
-5.1
-5.1
-0.1
-0.4
-0.1
0.2
Russia
7.3
3.5
-0.7
-5.9
-6.5
-7.5
1.3
0.5
1.5
1.5
China
9.8
8.5
6.7
6.5
7.5
8.5
8
7.5
8.5
9
India
8
6.3
5.1
4.5
5.4
5.4
6.5
5.6
6.5
6.4
World
3.9
2.2
0.5
-1.3
-1.4
-1.1
3.0
1.8
2.5
3.1
Source: World Economic Outlook updates, IMF
3
Impact on India
4
Global Crisis and India
• Three Principal Channels of Transmission
– Financial Markets
•
•
•
•
Banking Sector
Capital Markets
Remittances
Commercial Borrowings
– Exports
– Exchange rate
5
Limited Impact on Indian Banks:
Quarterly Performance Indicators
Profit Grow th
80
Profit Margin
15
10
40
5
20
0
0
Profit Margin
YOY Profit Growth
60
-5
-20
Source: Prowess, CMIE
Note: Profit Margin = PAT % to Total Income
Mar, 09
Sep, 08
Mar, 08
Sep, 07
Mar, 07
Sep, 06
Mar, 06
Sep, 05
Mar, 05
Sep, 04
Mar, 04
Sep, 03
-10
Mar, 03
-40
6
Gross NPAs % to Gross Advances
6
5.2
5
4
3.3
3
2.5
2.3
2.2
2007-08
2008-09
(S elec ted B anks )
2
1
0
2004-05
2005-06
2006-07
Source: Report on Trend and Progress of Banking in India, 2007-08, RBI and Prowess, CMIE
7
Month on Month Change in Outstanding
Non-Food Credit
120000
Credit Crunch
ECB Frozen
100000
80000
60000
40000
20000
0
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
-20000
-40000
2007
-60000
Source: Reserve Bank of India
Note: Values in Rs. Crore
2008
2009
Dec
Jan
Feb
Mar
Month wise Non Food Credit Growth,
YOY
35.0
30.0
25.0
20.0
15.0
10.0
5.0
Source: Reserve Bank of India
Note: For the month of September the data is only available up to 25th
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
0.0
•Outflow through banking channels
2009.08.06
2009.07.21
2009.07.04
2009.06.17
2009.06.01
2009.05.15
2009-04.29
2009.04.13
2009.04.27
2009.04.11
2009.03.25
2009.03.09
2009.02.20
2009.02.04
2009.01.19
2009.01.02
2008.12.17
2008.12.02
2008.11.18
2008.11.04
2008.10.21
2008.10.06
2008.09.19
2008.09.03
2008.08.18
2008.08.01
Liquidity Crisis
Weighted Call Money Rate
25
20
15
10
5
0
•Inter-bank call money rate spiking to 20% in October 08
•Drying up funds from domestic and foreign capital markets leading to
pressure on bank financing
10
-6000
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Net FII Inflows,million US$
Crisis and Indian Capital Market:
Net FII Inflows
8000
Annual Net FII Inflows, US$ billion
6000
4000
Source: SEBI
2006-07:
3.2
2007-08:
20.3
2008-09:
-14.1
4260
2000
0
-2000
-4000
11
Monthly FDI Inflows
Annual FDI Inflows, US$ billion
2006-07:
22.8
2007-08:
34.3
2008-09:
31.6
(Apr to Jul):
7.0 / 10.0 / 5.0
6000
FDI Inflows. US$ million
5000
4000
3000
2000
1000
0
Apr.
May
Jun.
Jul.
Aug.
2007
Source: RBI Bulletin, June 11, 2009
Sep.
2008
Oct.
Nov.
2,009
Dec.
Jan.
Feb
Mar
Stock Market Collapse
BSE Sensex
25000
Market Capitalisation Index
19827
120
20000
100
80
15000
59.51
60
10000
40
5000
20
30.77
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Jan,03
Mar
May
Jul
Sep
Nov
Jan,04
Mar
May
Jul
Sep
Nov
Jan,05
Mar
May
Jul
Sep
Nov
Jan,06
Mar
May
Jul
Sep
Nov
Jan,07
Mar
May
Jul
Sep
Nov,0
Jan,08
Mar
May
Jul
Sep
Nov
Jan,09
Mar
May
Jul
Sep
Dec-07
0
0
M arket Capitalization % to GDP
109
120
100
80
95
86
80
60
40
42
56
52
23
20
0
200203
200304
200405
200506
200607
200708
200809
2009.10
(up to
Aug)
13
Source: Reserve Bank of India
Jun 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
44.3
Mar 07
2008-09:
Dec 06
40.7
Sep 06
2007-08:
Jun 06
27.9
Mar 06
2006-07:
Dec 05
Sep 05
Jun 05
Mar 05
Dec 04
Sep 04
10.0
Jun 04
12.0
Mar 04
14.0
Dec 03
16.0
Sep 03
Jun 03
Mar 03
Values in US $ billion
Remittances Inflow
Annual Net Remittances Inflow, US$ billion
8.0
6.0
4.0
2.0
0.0
14
Source: Reserve Bank of India
Aug 09
Jul 09
Jun 09
May 09
Apr 09
Mar 09
Feb 09
Jan 09
Dec 08
Nov 08
Oct 08
Sep 08
Aug 08
Jul 08
Jun 08
May 08
Apr 08
Mar 08
Values in US$ million
External Commercial Borrowings
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
15
A ug 09
E x ports
J ul 09
J un 09
May 09
A pr 09
Mar 09
60
F eb 09
J an 09
Dec 08
Nov 08
O c t 08
S ep 08
A ug 08
J ul 08
J un 08
May 08
A pr 08
Mar 08
F eb 08
J an 08
Imports and Exports Growth
80
Imports
40
20
0
-20
-40
-60
16
Foreign Reserves & Exchange Rate
FER (US$ bn)
55.00
Exchange Rate (Rs/$US)
340.0
320.0
50.00
300.0
45.00
280.0
40.00
260.0
240.0
35.00
220.0
W2 Sep 09
W2 Aug 09
W2 Jul 09
W2 Jun 09
W2 May 09
W2 Apr 09
W2 Mar 09
W2 Feb 09
W2 Jan 09
W2 Dec 08
W2 Nov 08
W3 Oct 08
W3 Sep 08
W3 Aug 08
W3 Jul 08
W3 Jun 08
W3 May 08
W3 Apr 08
W3 Mar 08
200.0
W3 Feb 08
30.00
•Stock of Reserves falling from $315 bn in May 08 to $271 bn in July 09
•Around 63 percent of decline in reserve can be attributed to valuation, hence actual decline in
reserve is around US$ 20 billion
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•Rupee tumbled by 27% from end-Apr 08 to end-Mar 09 and witnessed a small gain thereafter
Policy Response
18
Budget Outlays on Rural India:
Blessing in Disguise
Values in US$ billion
Ser.
No.
Item
2008-09 (RE)
2009-10 (BE)
1
Bharat Nirman
6.25
8.18
2
NREGS
6.00
6.02
3
Fertilizer Subsidies (a+b+c)
a.
Indigenous Urea
b.
Imported Urea
c.
Concession on Decontrolled Fertilizers
15.17
3.30
2.20
9.67
10.00
1.72
1.56
6.72
4
Farm Loan Waiver
13.06
-
5
Total
40.49
24.20
MSP for Wheat increased from Rs. 630 per quintal in 2003-04 to Rs. 1080 in 2008-09
(71 % increase)
MSP for common variety of paddy increased from Rs. 550 per Quintal in 2003-04 to
Rs. 900 in 2008-09 (63 % increase)
19
Source: Union Budget
Fiscal Stimulus
• Three packages of fiscal stimulus, early Dec 08, early
Jan 09, early Mar 09
• Across-the-board excise duty reduction by 4 %age points
• Additional plan spending of US$ 4 billion
• State governments allowed additional market borrowing of US$ 6
billion for plan expenditure
• Assistance to export industries
• 2 percentage point reduction in central excise and service tax
• Current excise duty rate: 8 percent
– Direct fiscal burden of stimulus 1.8% of GDP
– Fiscal deficit (Central and States combined) rising sharply
to 11% of GDP in 2008-09 (5.4% in 2007-08) and likely to
be over 10% in 2009-10
20
Monetary Policy Response:
RBI Policy Rate Changes
10
Reverse repo rate
Repo rate
Cash Reserve Ratio
9
8
7
6
5
4
3
2
1
Apr 21,09
Jan 17,09
Dec 8,08
Nov 3,08
Oct 20,08
Aug 30,08
Jul 19,08
Jun 25,08
May 24,08
Apr 26,08
Aug 4,07
Apr 14,07
Mar 3,07
Jan 31,07
Dec 23,06
Jul 25,06
Jan 24,06
Apr 29,05
Oct 2,04
Mar 31,04
0
•Credit tightening from Sep 2004 to Aug. 2008 and loosening thereafter
•Cash reserve ratio (CRR) brought down from 9% to 5%
•Statutory liquidity ratio (SLR) from 25% to 24%
•Repo rate reduced from 9% to 4.75% & reverse repo rate from 6% to 3.25%
•Special window for banks in their lending to mutual funds, NBFCs and housing finance
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companies
•Refinance facility for banks from the central bank & dollar swap arrangements, etc.
RBI Liquidity Injection
Actual/Potential Release of Primary Liquidity
since Mid-September 2008 (US$ billion)
1
Cash Reserve Ratio (CRR) Reduction
32.7
2
MSS Unwinding
12.9
3
Term Repo Facility
12.2
4
Increase in Export Credit Refinance
5.2
5
Special Refinance Facility for SCBs (Non-RRB)
7.9
6
Refinance Facility for SIDBI/NHB/EXIM Bank
3.3
7
Liquidity Facility for NBFCs through SPV
5.1
Total (1 to 7)
Memo: Statutory Liquidity Ratio (SLR) Reduction
79.2
8.2
Nearly US$80 billion, over 7% of GDP of liquidity release
22
Assessment of Policy Response
23
Assessment of Fiscal Policy Response
• Anticipated the Crisis!
• limited fiscal headroom: High fiscal deficit: 11 % to
GDP
• Too late because of the state of denial that came from
the theory of decoupling and strong fundamentals
Looking forward
• Government could monetize fiscal deficit
• Increase in public debt-- 2008-09: 78 % to GDP
• Credit Rating downgrading could hamper capital
inflows and could raise the cost of borrowing
• Modality of fiscal stimulus
24
Assessment of Monetary Policy Response
• Aggressive and appropriate
• But has had limited impact so far– may show effect
with lag
• Commercial bank’s lending rates are still high at
around 10 %
• Reduction in policy rates is not filtering in to the retail
market, because of following reasons:
– The risk averse attitude of commercial banks
– Increase in Government borrowings– crowding out25
Quarterly GDP Growth
Potential Measures for Reigniting Growth
27
Potential Measures for Rebalancing the
Growth
• Fiscal options are not available
• Improve monetary policy traction and access to credit for
the SMEs
• Initiate Second Generation Structural Reforms to increase
the potential rate of growth. These should focus on:
– Infrastructure – Implementation capacity
– Education – liberalization and quality
– Business/investment environment
– Public health: Delivery and Quality
– Agriculture
28
THANK YOU
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