Red-tape safety knot for India's bankers
By Raja Murthy
MUMBAI - The villain has turned hero in India as economists in the country
carry out their own autopsies on the latest collapses of United States
institutions such as Lehman Brothers and AIG.
They are now acknowledging that the largely government-controlled banking
system - often cursed for restricting growth - has served as a safety belt in
the global credit crisis. India's regulatory mechanisms may even offer a global
role model in balancing growth with risk management.
Even as Merrill Lynch was carpet bagged and insurance titan AIG tottered,
India's Tata AIG insurance policy holders were reassured that their policies
were safe, being partly underwritten by
stipulations of insurance sector regulator Insurance Regulatory and Development
Authority (IRDA).
According to IRDA stipulations, an insurance company must have a minimum
solvency margin of 150% (the ability to pay claims, and maintaining an excess
margin of assets over liabilities).
That does not mean bailouts are absent from the Indian bank system. Unit Trust
of India, India's largest mutual fund, required a $3 billion rescue in 2002,
using public money.
Regulators such as the Reserve Bank of India, usually seen as Big Brother
nuisances in good times, become indulgent sugar daddies during darker times
such as the present.
Thanks to fussy regulators, India's financial system is considered by some
analysts and economists as more secure than those in other Asia-Pacific
economies and even that of the United States.
"India has a very strong regulatory and market management mechanism in place,"
said Ajay Bagga, chief executive of the Mumbai-based Lotus Mutual Fund, a joint
venture between Fullerton Fund Management Group and Sabre Capital Worldwide.
"Even during the 1997 Asian currency crisis, India emerged relatively
unscathed."
Bagga says that India could easily weather the global credit crunch and
economic slowdown, given factors such as the country's strong foreign exchange
reserve (over $200 billion) and large domestic markets.
Saurabh Tripathi, a senior analyst at Boston Group, told Asia Times Online that
there is little chance of a Lehman-type failure in India. "There is hardly any
comparison between the potential risks inherent in bank balance sheets in the
US and India," said Tripathi. "India's regulations have been very conservative
and structured finance and derivative markets have been very undeveloped."
Tripathi said that, unlike American banks, most Indian banks have "very strong
balance sheets with low NPA [non-performing asset] ratios, with many banks
having as high as 80% coverage ratios. Actually, Indian banking balance sheets
are probably one of the most robust in Asia and in emerging markets."
India's government-owned banks account for nearly 70% of the banking business
in India, and are the long-standing inspiration to close government scrutiny of
the financial market, a scrutiny that in good times is seen as restrictive to
growth.
India's conservative policy planners don't often get such applause, usually
having to face high-pitched demands for more deregulation, such as letting the
derivatives market run loose.
"Regulatory restrictions have also kept certain derivatives markets, especially
for currency derivatives, from developing," chided the high-level Raghuran
Rajan Committee on Financial Sector Reforms in its recent study commissioned by
more hawkish elements in the Planning Commission, India's top economic
think-tank.
Raghuram Rajan, a professor of finance at the University of Chicago's Graduate
School of Business and former chief economist of the International Monetary
Fund, chaired the study, which appreciated India's "vibrant" banking system.
Banking reforms since the early 1990s "have increased the efficiency of the
banking system, and the ratio of non-performing loans to deposits is about 1% -
a remarkably low level," said the report.
But the reforms, the Rajan Committee suggested in April 2008, included letting
the market have a freer run with derivatives, and being less conservative with
regulations over currency derivatives.
But now conservatism is winning bouquets even from growth enthusiasts such as
billionaire industrialist Anil Ambani, head of companies such as Reliance
Communications and Reliance Energy, who gave "thanks to the calibrated,
cautious and conservative approach of our policy planners for the global credit
crisis having a minimal impact on India".
What was earlier perceived as weakness is now seen as strength, and after the
recent Wall Street upheaval, even India's government-owned banks, often
considered country bumpkins to the flashier new private banks which came into
their own in the past decade, are being viewed as more dependable.
ICICI, India's largest private bank with $100 billion in assets, took a $28
million hit in India after Lehman collapsed, and maybe $80 million in its
British operations. None of India's government-owned banks has made the
headlines among the recent bad news.
Around 3,000 finance market jobs in India are under threat following the
collapse of Lehman and Merril Lynch, and wealthy investment bankers are now
left envying lower-paid minions in India's government-owned financial
institutions.
Even as Lehman employees in Mumbai, India's financial capital, saw dreams of
luxury condominiums vanish like ghosts at sunrise, one shocked employee told a
reporter, "I wish I was working in the [government-owned] State Bank of India.
At least I would not have lost my job." A week earlier that sentiment would
have been as likely as Cinderella opting for her initial career as an unpaid
maidservant.
India's equity banking and financial professionals have until the latest
upheaval been riding the Cinderella golden pumpkin carriage of super fat
salaries, with fund managers pocketing $1 million salaries in an estimated $138
billion industry, according to a February 20 International Herald Tribune
report.
Ajay Bagga, chief executive of the Lotus Mutual Fund, said in the IHT article,
"Especially sought-after chief equity managers have been able to raise their
pay by up to 300% in one job move, to between $500,000 and $600,000 a year.
That is comparable to levels in Singapore and Hong Kong."
Six months on, and the golden tide. "The situation has changed dramatically
now," Bagga told Asia Times Online. "Many hedge funds have gone under, and some
hedge fund managers have joined mainstream asset management companies."
Given the global downtrend, Bagga said many more Indians working abroad in
global firms were applying to return to Indian markets. "Hence we expect the
supply of experienced fund management talent to go up in the next few months."
Second-tier Indian companies can also happily grab top-tier talent at cheaper
salaries after the latest episode of Wall Street horrors. More financial whiz
kids are said to be rewriting their CVs to exchange glamour salaries for the
security of more stable positions - and escape the risk of having a $500,000
salary on Sunday evening evaporate into jobless insecurity on Monday morning.
The chastened nervousness has filtered down to business school students, such
as in the elite Indian Institute of Management, Bangalore, where investment
banking is estimated to bag nearly 70% of interns. IIM Bangalore will have a
changed campus-recruiting leader this academic year - Lehman was their top
recruiter to date.
India's banking sector reforms began in the early 1990s with the opening of the
Indian economy, but regulations periodically tightened following stock market
scams such as ones engineered by stockbrokers Harshad Mehta in 1992 and Ketan
Parekh in 2001.
"In India, the focus is on regulatory comfort, going beyond regulatory
compliance," Y V Reddy, until September 5 the Reserve Bank of India governor,
said at a "Meeting of the Task Force on Financial Markets Regulation" in
Manchester in England on July 1. "In a choice between emphasis of regulations
on saving capital and protecting depositors' interests or reinforcing financial
system stability, the latter has always prevailed."
The Reserve Bank of India (RBI) has been regularly sending out risk-control
orders, such as a January 2002 advisory to banks in India for an Investment
Fluctuation Reserve to be built within five years, to guard against interest
rate risks.
The more frequently in-the-news statutory liquidity ratio (SLR) of the RBI is a
mandatory requirement for banks to invest in government securities up to 25% of
their demand and time liabilities, or payments the bank has to make any time on
demand or due in the next 30 days.
After the country's real-estate market overheated in recent years, a June 2005
RBI advisory kept close watch on banks on their real-estate exposure.
Even Indian accounting standards have a crucial difference to the widely used
International Financial Reporting Standards, one that helps discourage
accounting devices that help to generate profit-related bonuses, such as the
infamous $22 million bonus given to Lehman chief executive Richard Fuld this
March. Projected market gains are ignored in Indian accounting standards, while
projected losses have to be accounted.
"In India, we are yet to fully adopt the mark-to-market requirements as
available in the international standards," said Reddy, the former RBI governor.
"The Indian standards are relatively conservative and do not permit recognition
of unrealized gains in the profit and loss account or equity, though unrealized
losses are required to be accounted."
Instead of fears of similar bust-ups in India, the Wall Street meltdown has
only intensified India's growing self-confidence another gear up.
India's feisty Commerce Minister Kamal Nath, the bane of US negotiators in the
recent World Trade Organization Doha Round talks, even took a gloating potshot.
"Those who preached us 'best practices' have not helped their own financial
sector," he told reporters asking him to comment on the US financial crisis,
hinting perhaps that it's time for know-it-all financial experts in the US to
learn a few lessons from India.
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