Unlike most countries, multi-layers of loan securitisation, derivatives trading using deposit holder’s money, and lending to known sub-prime quality borrowers are not allowed in India. RBI has also been strict in monitoring the health of the banks using several measures and reports.
Greece has been under severe strain for the past few months due to bad debts carried by its banks. The episode is expected to come to a close soon with the investors losing money by the ton. This time around most of the investors are common citizens of Greece. Even before the Greek trouble could end, the Portugal banks are facing problems.
Are banks safe in India?
To answer this question we need to see the difference between the areas where banks can invest in India and in other countries. Indian banks are allowed to deploy their money only in traditional (prudent!) areas of investments and lending.
Unlike most countries, multi-layers of loan securitisation, derivatives trading using deposit holder’s money, and lending to known sub-prime quality borrowers are not allowed in India. RBI has also been strict in monitoring the health of the banks using several measures and reports.
Guarantee for deposit
In spite of these measures there is no guarantee that a bank will not fail. We have had instances in the past in India too where RBI and the Government has had to intervene in different ways to protect customers of banks that failed.
All banks also have to pay a premium to RBI for the Bank Deposit Insurance. This basically guarantees depositors money to the extent of Rs.100,000/- of deposit per account. This is an archaic amount that has not been revised for almost 2 decades now.
Public Vs Private Vs Foreign bank
“Which among the above is a safe bank category to invest in?” – is a question on many people’s mind. The answer each one has its own risk. Subject to the same RBI guidelines, each bank will have to be individually assessed to determine its stability. There is no guarantee that that one category of bank is safer than the next.
Even foreign banks have to be separately capitalized for their operations in India. That way even if the parent bank collapses abroad, technically the Indian entity will be able to function on its own.
Good governance
The strict regulations and close monitoring done by RBI is a blessing for the Indian banking industry. Even during the peak of the Global Financial Crisis, when hundreds of banks were collapsing in the USA, none of the Indian banks faced trouble.
The same act was repeated during the crisis in Dubai. Again now when the Greece crisis is playing it out, Indian banks are going road solid.
RBI is not resting on its laurels, it has recently further tightened the rules relating to loans securitization in India.
Possible cause for worry
There is some cause for worry though; in the past few years (over 3 years now) the income source for banks in India has shifted drastically. Earlier the main source of income was from the interest rate spread. This is the income that the bank gets from its core banking operations – borrow at a lower rate from deposit holders and lend at a higher rate to borrowers.
The second source of income started taking prominence about 5 years ago. This was from services. This is basically income form services offered to customers other than the core banking operations of the bank. Income from commissions by selling them products like debit cards, credit cards, life insurance, mutual funds, gold coins, forex services, etc also fall into this category.
The last 3 years or so, more than a third of the banks’ income is coming from treasury operations. These are income got by trading in bonds, forex, interest rate futures, etc. Some of these are highly speculative in nature and can cause as much (or more) loss than the bank is making. There are as of now regulations for the bank on what money can be used for these activities. But with banks being flush with money due to low interest rates and decrease in the CRR and SLR during the global financial crisis, more and more money has found its way to treasury operations.
Proper training for the personnel and closer monitoring of the treasury operations is required for all banks in India.
Conclusion
It is a given that Indian banking operations are much safer than the ones followed by banks abroad. Having said this, there is still scope for the regulator RBI and the Government to take further measures to protect the interests of the investors.
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