Global and economic recession: Impact on banking sector in India

During 2008 the global financial crisis and economic downturn increased uncertainty and negatively affected the world wide economy. The sharp decrease in export volumes during the latter half of 2008 and the first quarters of 2009 has already had a major impact on industry. This is also evident from the financial forecast which, despite noting signs of stabilization in the economy, indicates that the indirect impact of the financial crisis may cause significant risks to the economy and inflation. When the financial crisis erupted in a comprehensive manner on Wall Street, there was some premature triumphalism among Indian policymakers and media persons. It was argued that India would be relatively immune to this crisis, because of the “strong fundamentals” of the economy and the supposedly well-regulated banking system.

One of the key features of the current financial turmoil has been the lack of perceived contagion being felt by banking systems, particularly in Asia. The Indian banking system also has not experienced any contagion, similar to its peers in the rest of Asia. A detailed study undertaken by the RBI in September 2007 on the impact of the subprime episode on the Indian banks had revealed that none of the Indian banks or the foreign banks, with whom the discussions had been held, had any direct exposure to the sub-prime markets in the USA or other markets. However, a few Indian banks had invested in the collateralised debt obligations (CDOs)/bonds which had a few underlying entities with sub-prime exposures. Thus, no direct impact on account of direct exposure to the sub-prime market was in evidence.