The past year witnessed a lot
of turmoil in the Indian banking
industry owing to the global financial crisis. The Reserve Bank of
India (RBI), Ministry of Finance and other regulatory authorities have made
several notable efforts to improve regulation in the sector. Many big banks
operating in the market have made use of the changed regulations (viz., change
in CRR and interest rate) to provide better options to potential and new
customers. Adoption of new practices to cater to the demanding economy
situation has enabled the banks to meet the changing customer requirements.
Compared to other regional banks, over the last few years, Indian banks have
performed favorably on growth, asset quality and profitability. The banking
index has grown at a compounded annual rate of over 51% from April 2001
compared to the market index for the same period, which registered a growth rate of 27%.
The crisis that hit the financial services industry initially in the US
and almost immediately in the entire world has moved our focus towards
critical systemic issues—not only in the US banking business but also in India.
Globally, these systemic issues are being tackled at the legislative and
regulatory levels; in India, the solution to the systemic issues will require
significant inputs and regulatory, industry and infrastructural interventions. To
ensure survival, banks tried to quickly assess their liquidity reserves and
capital position to check if they had any exposure to the failing global entities.
Additionally, this check also meant a clear pulling down of new/additional
credit outflow, unless and until their positions were clear. Over a short span of
time, the situation resulted in banks totally stopping the outflow of new credit.
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