5 min read.Updated: 13 Sep 2018, 11:21 AM ISTLivemint
The biggest reforms that took place in the last 10 years had their roots in the global financial crisis. Experts across industries tell us about the changes
Prakash Agarwal, director and head – Financial Institutions, India Ratings and Research
Banking system more robust
On the 10 years since the Lehman collapse, the Indian banking sector has transformed drastically. Private banks have firmed up their roots and now their share has increased to 31% from 23% in 2008.
Technological advancement and wider reach of banking and related services is changing the face of the industry.
Compared to the position in 2008, regulations have become tighter with Basel 3 requirements on liquidity buffers, in addition to minimum capital requirement for banks. The regulator is also looking for more specialised institutions and has provided a licence to small finance banks, payment banks and wallets.
In 2008, largely it was only the banking sector that was providing credit. The financial markets are deeper now. The bond market and the debt funds’ assets have been growing at a compounded annual growth rate of around 30% in the past few years. Going forward, this can become a fairly good credit provider, at least for large corporates. On the retail side, non-banking finance companies have become larger and stronger compared to their positions in 2008.
While there is a overhang of NPAs at present, the overall banking system has become more robust in terms of systems, processes and regulations. Once this overhang passes, their ability to absorb shocks to meet the requirements of the economy will be stronger than it was in 2008.
Rajeev Thakkar, CIO , PPFAS Asset Management Co Ltd
Big is no longer beautiful
The financial crisis in 2008 quickly escalated to encompass a broad range of activities. At its worst, banks had stopped lending to one another and corporates and even iconic companies like GE could not borrow in the money markets. Nothing was safe and even money market funds were at risk of defaults to investors. One big change that has happened is that big is no longer beautiful in the financial sector. A lot of firms are now classified as too big to fail and they come with disadvantages like higher capital requirements, stringent supervision and so on.
Another factor which has come into focus has been conflicts of interests between the investment banking division and the research divisions of financial firms. This has led to greater demarcation of roles and higher scrutiny. The cost of capital has come down dramatically across the financial sector given the massive pumping of money in the system by central banks. We have probably seen for the first time in recorded history the concept of negative interest rates and consequently some fear new bubbles are being inflated.
The role of rating agencies has been questioned post the crisis. While at the surface, many regulations have changed, human nature and behaviour may never change and the cycles of greed and fear and the consequent boom and bust cycles may never end.
One thing I can’t forget from those days of the financial crisis is how surprising it was for me to see client psychology. The two most evident behaviour characteristics that came forth were—resilience and magnified fear.
When we do the risk tolerance exercise today, the clients who remained resilient or invested through the crisis are the ones whose risk tolerance and asset allocation are aligned. That’s the reason why in the crisis period they never displayed panic. Back in 2008, we didn’t use licensed financial tolerance tests in India and deep understanding into interpreting the profiles was a gap. One example is where a couple, both medical professionals, thought they had risk tolerance and we gradually moved closer to 80% equity exposure. Markets had already started correcting from January 2008 and this event certainly had a negative impact on their portfolio. There was a sense of panic and we redeemed to prevent further damage at the behest of the client. When we did a licenced risk tolerance test in June 2013, the results showed low risk tolerance and asset allocation towards equity was set at 15% exposure. Risk tolerance is a vital step in advisory and if done rightly, the very role of the advisor to protect wealth is achieved. Advisors and clients need to be reminded continuously that excitement is the last thing you can have in managing money.
R M Vishakha, MD and CEO, IndiaFirst Life Insurance Co. Ltd
Insurance sector has stabilised
The 2008 crisis jolted all the financial sector regulators. There were murmurs that the Indian market also wanted to offer structured bonds that made sub-prime lending easy, but it was RBI that disallowed it. When the crisis hit, the markets acknowledged the role that the regulators play in managing the economy. It can’t be disputed that India was saved as we were better regulated.
It was at that time that Irdai shifted gears to look hard at the sector from a regulatory standpoint. That was also the time when, with the sharp downturn in the markets, misselling in Ulips and fund value depletion was a much discussed subject in various echelons of the financial market. The crisis exposed high-cost structure of Ulips that led to destruction of wealth and this is what triggered the big wave of reform in life insurance products and distribution landscape. The insurance sector wasn’t impacted by the crisis directly, except for the exit of a few foreign investors. However, the ensuing regulatory actions impacted the sector in a big way as the industry witnessed negative growth due to regulatory changes in product construct, cost caps and distribution. These changes, however, were much needed as they helped the industry focus on key parameters like persistency. Over time, the industry has stabilised and is gearing for the next big leap. The big change now is that regulatory oversight and developmental push now go hand in hand.