Friday, September 18, 2009

Indian Model of Financial Services

It has become fashionable in this country to believe that anything to do with financial services has to be made in America without being aware about the ground realities. As the world commemorates the first anniversary of collapse of legendary Lehman Brothers, it would be vital to memorize that India was one of the few economies where banks and other financial services didn’t felt similar trouble; the cause were very simple that regulatory regime in India never shown leniency for unethical practices.
RBI has been consistently monitoring the situation since credit bubbles start in western and some leading Asian economies half decades ago; Indian central bank timely acknowledged the difficulties ahead and so never let allow banks to deal in exotic or toxic financial instruments. Credit delivery structure in India has stark differences from U.S.A or any other western economies; here in India banks follows well placed collateralized support for all commercial lending that minimize the risk of non performing assets.
There is utmost need to understand the Indian point of view to appropriate any functional change in financial system; context out rightly matters in any specific change in a system, like nationalization of banks in 1969 by the government was a prudent initiative from India’s own perspectives but quite astonishing from western point of view as they considered than it as a sheer humble effort of a languishing economy.
But now the landscape is entirely shift and leading policy makers from U.S.A, Vis Joseph Stiglitz, Henry Kaufman (Former board member, Lehman Brothers) necessitates on the better regulation and rationalization of the bank’s size. Indian economy being the second growing economies of the world should avail its edge of financial services which all is in well shape and naturally growing under the regulatory compliance's but still some policy makers in India couldn’t foresee the forward development in appropriate sense.

The Committee for Financial Sector Assessment, the high level RBI- Government of India’s joint assessment group came out with its conclusion that “Financial soundness indicators” like capital adequacy, asset quality and profitability of Indian banks were found in good state at the end of last year. As per the Basel Standards the Capital to Risk Weighted Asset Ratio (CRAR) of banks that’s a required amount to incurred unexpected looses should be maintain at minimum nine percent.
The CRAR for all Indian banks except two (One an old private bank and the other a foreign bank) stand substantially higher than the recommended minimum and also steadily improved over the years. Capital adequacy in the PSBs as group is itself stands above the norms; it was an average of 12.5 percent as of March2008.

In spite of witnessing such conducive fundamentals, officials in finance ministry is making exercise to flee to World Bank for merely three billion dollars loans to recapitalize the Public Sector Banks that seems quite shocking since there are several options are available within their own ambit.
Foreign exchange reserves must be a most reliable source for the government to fulfill its obligations; this way the banks would have recapitalized and they remained in government. China did same with such options even though their requirements were quite high from India, surely such options be less expensive and without any conditions.I again stressing on the potential imposition of conditions from World Bank following after such conceived materialization like, consolidation of banks, abrupt liberalization in their specified terms and conditions which may left many adverse repercussions.

Any major policy initiatives in India must be free from any external pressures because we can judge our requirements best in our conditions. In last two decades Indian financial sector has been witnessing a gradual and regulated liberalization which may remain bone of contention even in further time.
Consolidation is another matter that must be seen in the light of genuine perspectives; U.S.A’s biggest bank is tenth time bigger than India’s largest bank albeit that not guarantee the performances as we have witnessing sixty nine failures in American financial services till now and many more in future. We have many options to follow the Raghuram Rajan committee and Percy Mistry committee on financial sector reform rather than becoming entangled with external institutional pressures.Complexities could never be an ideal condition, so a comprehensive way would always be an imperative; we can come out with many innovations like adoption of consortium finances in place of unnatural consolidation and liberalization with ongoing regulatory norms. So, at the moment our hand is not tight only we have need to priorities the potential propositions.

Atul Kumar Thakur
17th September2009, New Delhi

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