Banker after banker comes at regular intervals with his CEO’s cheerful face on Indian television explaining how little the exposure of his/her bank has been to the now-defunct Lehman Brothers. Time and again (and at times almost daily) the finance minister-until-recently used to beam out of television channels trying to reassure the panic-stricken Indian investor population, upholding his growth target of 8% and extolling the resilient spirit of the Indian capital markets (then) and that of its masses (now).
No one is advocating opening up the banking sector to what is being seen as a toxic, profligate, Western financial system, especially when their liberalized financial markets are taking refuge under the safe arms of nationalization in an act of déjà vu. Commentators remind us of the Asian financial contagion crisis of 1997 when an underdeveloped banking industry and capital controls saved India from the perils of “casino capitalism”.
All the glory goes to RBI, which limits the ability of foreign banks in India to expand and also maintains strict controls over mergers and acquisitions and limits cross-ownership across banks. McKinsey had earlier estimated that loosening the state’s grip over the banking system could release as much as $48 billion of capital a year.
Nevertheless, a major rise in non-performing assets seem to be inevitable. Outstanding bank credit in India has risen 3.4 times in the five years ended 31 March 2008. India’s financial assets to GDP at 160% is behind China’s at 220%. What has hit the banking system most when it was in the midst of one of the strongest credit cycles in history has been the sudden, dramatic exit by foreign institutional advisers. In a deteriorating credit environment, CitiFinancial has closed a quarter of its branches.
Jayachandran / Mint
ICICI Bank’s London subsidiary has €57 million exposure to the beleaguered Lehman Brothers. Rising credit spreads for global banks during the past three months are likely to lead to mark-to-market provisioning of about $20 million. ICICI Bank, trading at about 0.7 times book value, has the lowest price/book value of its peers. The much-chastened K.V. Kamath has reined back balance sheet growth while shoring up capital ratios —ICICI still has an enviable tier I ratio of 11%. The bank’s wholesale funding has been the subject of many viral whispering campaigns. Its cheerleaders include two-thirds of analysts who work for sell-side intermediaries.
During the recent bear hammering and queueing up of depositors of ICICI Bank, RBI assured depositors that their money was safe. The bank’s management was more voluble, indignantly complaining the bank was prey to “baseless and malicious rumours”, and demanded a probe into an intermediary’s stock price manipulation. It’s another thing that Sebi found the allegations of the bank baseless.
China with its reserves of $2 trillion and India with its share of about $250 billion find reason to rejoice. If Chindia wants to aim to achieve superpower status, it needs to liberalize its financial system, adopt global best practices and globally integrate itself. If the Chinese renminbi and the Indian rupee want to be the reserve currencies of the future, they need to become fully convertible.
ICICI Prudential’s portfolio management service has Principal Protected Portfolio IV and V, which had been guaranteed by Lehman Brothers Securities India. The “gap risk” had been guaranteed by Lehman Brothers Securities Pvt. Ltd, backed by a letter of comfort from Lehman Brothers Holdings Inc. Now that the company has shut shop, the letter of comfort may not be legally binding. It is lamented that if foreign entities were never allowed to operate in India, this would have never transpired.
When risk is unambiguously “made in the US”, the response of the market is to sell everything that is not in the US. Emerging markets, as measured by MSCI, have fallen more than US stocks in 2008. Oil itself has dropped by 70% within three months. Till now, “emerging markets” and “oil” were the only credible ways to profit. With the rise of risk aversion, this model seems to have been jettisoned. The epicentre of the earthquake is in the US, but the tremors are being felt in India.
Although RBI has lowered interest rates and injected liquidity, it can be equated to “pushing on a string”. Faced with the prospect of sharp falls in bond yields (and thus rise in bond prices), most bankers would rather invest in government securities than lend (“lazy banking”). Most productive areas of the economy are capital-starved. The banking system is the nerve centre of any economy and Indian banks need further reform and consolidation to prepare for the next growth cycle. Till today, there is not a single bank which falls in the enviable list of the “top 10 banks in the world” by market capitalization.
An undernourished financial system may have helped India weather the deleterious effects of the global financial crisis over the short haul, but it will definitely act as a deterrent to India’s transition into a global superpower. Unless we have already lowered our benchmarks. But that is for yet another day.
Sunil Kewalramani is CEO, Global Capital Advisors. Disclaimer: The author may have advised some clients in accordance with the opinions expressed above and he/his clients would have invested accordingly in stocks. Comments are welcome at firstname.lastname@example.org