BOB Profile-Sept05

1
Banking Crisis Beyond by Mr M. D.
Mallya Chairman Managing Director Bank of
Baroda November 25, 2009
2
Key lessons learnt from the crisis

• India cannot remain insulated from the developed
  world
• as its trade to GDP ratio has increased from
  18.62 in FY98 to almost 39.0 in FY09.
• the crisis spread to India via the trade as well
  as the financial markets even if India had no
  direct exposure to subprime or toxic assets.
• Indias healthy stock of Foreign Exchange
  Reserves (FER) helped the country stabilise its
  exchange rate without much damage.
• Indian rupee depreciated against USD by 11.1
  during Sept 15, 2008 to Mar 30, 2009. However, in
  FY10 it staged a strong recovery of 9.4 till
  mid-Nov, 2009
• Indias strong domestic growth drivers and timely
  response from the Government RBI helped it grow
  by 6.7 in FY09, when developed economies were
  crashing.
• Low leveraging and high savings of Indias
  corporate sector helped prevent redundancies.
• Government stimulus packages provided good
  support to investment consumption demand.
• Indias financial reforms since 1991-92 has put
  its regulatory framework and banks/ FIs in a
  strong position.
• Its reflected in the Indian banking industrys
  ROAA of 1.13, the CRAR of 13.98 and the Net NPA
  of 1.05 during 2008-09.

3
Key lessons learnt from the crisis

• Indias response to crisis was effective because
  it faced the crisis with fairly strong
  macroeconomic fundamentals.
• with growth at 9.1, average inflation (WPI) at
  4.7, current account deficit to GDP ratio at
  1.5 and fiscal deficit to GDP ratio at 2.7 in
  FY08
• Good fundamentals, in turn, provided scope for
  strong policy responses.
• However, going forward .
• India will always have to protect itself from the
  build up of global imbalances that is excess
  consumption of the US the savings glut in
  emerging Asia (resulting from the existing
  demographic profile of the world). At present,
  this looks inevitable.
• India should continue to have a healthy FER
  position as a buffer against the financial crisis
  without creating excessive dependence on exports
  a delicate balance?
• India has to learn from the flaws in western
  financial regulation with respect to derivative
  products, universal banking model, regulatory
  arbitrage enjoyed by shadow banks and the
  drawbacks of originate to distribute kind of
  models, etc.
• India has to ensure the growth of its financial
  sector in line with the real sector to avoid
  transmission of crisis from the financial to real
  sector.

4
Current economic scene

• The process of global recovery is widely
  perceived to remain slow and gradual, with
  receding but significant downside risks
• arising from premature withdrawal of stimulus,
  possibility of permanent loss in potential output
  in the advanced nations, unfinished financial
  corporate restructuring, sluggish private
  consumption investment demand, etc.
• Indian economy is on the path of mild recovery
  but stresses still exist in the form of rising
  food price inflation, continued contraction in
  exports, failure of monsoon 16.2 expected
  fall in the foodgrain production in FY10 and
  anemic demand for credit. The credit growth at
  single digit is lowest in the last decade.
• External demand dependent services such as
  tourism, cargo handled at ports, etc. are still
  depressed in India weak private consumption
  investment demand continue to be a key drag on
  fast recovery.
• The RBIs Monetary Policy Stance has shifted from
  Crisis Management to Recovery Management
• All unconventional liquidity support measures now
  stand withdrawn.

5
Looking beyond crisis

• The principal near-term risk for India is that
  the global recovery could stall.
• So, unless there are definite signs of a
  sustainable pick up in exports non-food credit,
  our monetary conditions should remain supportive.
• At the same time, fiscal credibility could be
  enhanced by announcing concrete medium-term
  consolidation plan.
• Over the longer horizon, there are significant
  risks of fragile global demand if the policy
  choices are not mutually supportive.
• So, in Developing Asian Countries including
  India, the focus should be on strengthening
  consumer confidence facilitating a pick up in
  private investment in industries geared towards
  domestic markets.
• Other thrust areas from a longer term perspective
  for India would be improvements in
  infrastructure, agriculture, financial
  intermediation, corporate governance, the quality
  of public investments and social safety nets.
• To quote Prime Minister Dr Singh at World
  Economic Forum, Our strategy today should not
  just be to deliver rapid growth, but to deliver
  rapid and inclusive growth to provide productive
  employment to our young population and raise
  living standards in rural areas ..

6
Imperatives for Indian financial sector

• The present past crises have taught us an
  important lesson a fragile financial sector can
  disrupt macroeconomic stability.
• As reiterated by our policymakers, we are now
  better placed to push the financial sector
  reforms forward.
• To get back to 9.0-plus growth trajectory, we
  need to pursue financial reforms to channel
  savings effectively into investment, meet funding
  requirement for infrastructure enhance
  financial stability.
• As a first step, we need to liberalise the
  restrictions on investments by pension
  insurance funds, which lead to a vast majority of
  assets being invested in public sector
  securities.
• A bill to raise sectoral cap in insurance sector
  from 26 to 49 is still pending before
  Parliament.
• We need to rationalize our taxes to boost
  long-term savings that can be used to finance
  infrastructure projects.
• Like a tax exemption on long-term life insurance
  pension annuity products, there should be an
  exemption on investments in dedicated
  infrastructure mutual fund schemes long-term
  bank deposits.

7
Imperatives for Indian financial sector

• The corporate bond market in India still remains
  limited in terms of nature of instruments, their
  maturity, investor participation and liquidity.
• A reasonably well developed bond market is
  required to supplement the banking system in
  meeting the requirements of the corporate sector
  for long-term capital investment besides raising
  resources for infrastructure development in the
  country.
• Indias currency, interest rate and derivatives
  market are still underdeveloped
• These markets have weak institutional structures,
  poor liquidity, lack of width or depth.
• Participation is constrained through a number of
  eligibility and origin barriers, and arbitrageurs
  and risk-takers are discouraged, impeding price
  discovery.
• In India, banks are still not allowed to deal in
  equity or commodity derivatives.
• There are many long standing complex issues
  involved in banking sector reforms like a roadmap
  for divestment of government ownership in PSBs,
  allowing investor voting rights in proportion to
  ownership, encouraging consolidation abolition
  of branch licensing, etc. that need immediate
  attention.

8
Imperatives for Indian financial sector

• Revival of rural banking
• Small but well regulated private deposit taking
  institutions should be allowed to focus on
  specific geographies unviable cooperative banks
  may be closed.
• The RBI is already making effort to revive the
  rural cooperative credit structure by mergers
  capital infusion in RRBs.
• From the perspective of financial inclusion, a
  wide range of local agents should be employed to
  extend financial services
• While technology can cut costs to improve the
  viability of the model, these agents should be
  allowed to levy user charges to recover costs of
  services. This would strengthen the Banking
  Correspondent model introduced by the RBI.
• Capital Augmentation could be a major challenge
  for PSBs, going forward.
• This could be managed thru several ways like
  amalgamations where business synergies exist or
  by allowing them to raise capital via newer
  instruments like issuance of perpetual preference
  shares in foreign currency, etc as recommended by
  CFSA, 2009
• If no other alternative is available, there could
  be a case for selective dilution of government
  equity.

9
Imperatives for Indian financial sector

• As recommended by CFSA, 2009, there is a need
  for capacity building in commercial banks with
  accent on training, succession planning, lateral
  recruitment at improved remuneration
• but at the same time discouraging excessive risk
  taking thru an appropriate balanced incentives
  structure.
• To conclude, Global Crisis2007-09 has offered
  India an unique opportunity to influence the
  decision making in important international
  organizations.
• Solutions to the evolving international financial
  architecture cannot be reached without taking
  India on board.
• India is the largest successful democracy (next
  to the U.S.) and a rapidly emerging economic
  power.
• India needs to grab maximum from the crisis to
  acquire a strong position in the new world
  economic order.
• As suggested by Dr Reddy (former RBI Governor),
  India can now effectively voice its concerns to
  modify the international trading arrangements for
  the benefit of developing countries apart from
  identifying strengthening itself.

10

• Thank you.