The Hindu Business Line : Indian banks acted on time

The Finance Minister, Mr P Chidambaram, and the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, have sought to allay fears on the impact of the worldwide financial meltdown on India’s banks and the economy.

Their views are perhaps based on balance of payments (BoP) data for the first quarter of this fiscal year, put out recently by the Reserve Bank of India. The data indicate that Indian banks retrieved $14 billion from world markets before the crisis started to unravel.

Net inflows of banking capital (excluding NRI deposits) -- which, as RBI explains, “primarily reflected the drawdown of assets held abroad by the Indian banks”-- increased by $2.4 billion in the first quarter over the corresponding period last year. Against outflows of $472 million in the first quarter of 2007-08, banks brought in a net amount of $1.92 billion this quarter.

This trend has been around for at least a year, coinciding with the outbreak of the sub-prime crisis. Net bank capital inflows were $11.5 billion in 2007-08, against net outflows of $2.4 billion in 2006-07. Banks would probably not have brought in $14 billion in a year, had it not been for the ongoing crisis.

Grey area

Despite such timely measures, the asset exposures of private banks are a grey area. Given the rapid drop in asset values of US banks, it may no longer be possible to undertake further ‘drawdowns’. The net inflows of banking capital can be expected to drop this year.

Net NRI flows in April-June 2008-09 increased by $1.36 billion over the corresponding period in 2007-08, or from a net outflow of $447 million to a net inflow of $813 million.

This is possibly an expression of faith in India’s banking system - 70 per cent of which is controlled by the public sector bank which tend to play safe with investments.

NRI inflows

The inflows have picked up only in this quarter. Net NRI inflows were $179 million in 2007-08, against $4.3 billion in 2006-07. A sudden change since then is perhaps more due to an erosion of faith in foreign banks and mutual funds than an attempt to take advantage of relative interest rate and currency movements.

Even as Indian banks survive the world crisis, its impact on the BoP situation leaves less room for optimism. Receipts from software exports, which were up in the first quarter, might suffer not only due to the slowdown in the world economy but also on account of exposures to the financial sector.

The current account deficit cannot be expected to get any better, given the 11.1 per cent gap between the rate of growth of imports (33.3 per cent) and exports (22.2 per cent) for the first quarter. The relatively lower net capital inflows of $13.2 billion for Q1 of 2007-08, against $17.3 billion in the like period last year may take a turn for the worse, if portfolio inflows continue to stay in negative territory. A drawdown on reserves to meet the current account deficit cannot be ruled out.