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Whole world is reeling under economic crisis. Growth rate of countries is slowing down. While some sectors have lost heavily, other sectors have revised their targets. Amidst all this turmoil, there is one industry that is making profits and guess what this could be?
It’s the epicenter of the financial tsunami-It’s the banking industry… The very cause of the turmoil in the world is now making money in India.
Is it the strict regulation of RBI or the traditional way of running the business that has helped the banks to be in profit ? Or is it the foresight of Indian banking system that has ensured that domestic banks are not heavily exposed to the credit derivatives like US banks ? The fact is that the Indian banks have not incurred huge losses unlike their counterparts in the US and rest of the world.
Banks which faced pressure on their margins till a couple of months back are now on their way to making money. With the RBI’s initiative to increase liquidity in the system, banks got huge amounts at their disposal for lending. Even the money that was lying with RBI and yielded very little profit is now available for banks for lending at higher rates. Banks are lending at higher than PLR to corporates due to the changes in circumstances and all these are helping banks to boost their bottom line.
Quite a few factors have contributed to the profit margin of banks:
- Reserve Bank of India has cut CRR by 3.5 % and brought it down to 5.5%
- It has cut the repo rate by 1.5 % and got it to 7.5%
- RBI cut the SLR by 1% and got it to 24%.
- Banks used to lend to companies at below BPLR but now they are lending at higher than BPLR as the risk profile has increased due to the hit on the margins of the companies.
- Banks used to shell higher deposit rates. But with the markets falling, people are finding deposits as a safe place to park their money and banks have cut down the deposit rate.
All these have increased the profit margin of the banks by 3%.
While all sectors of the economy are facing the heat of economic meltdown, it is surprising to see that our domestic banks are really making money.
Banking in India has been indeed a blessing in disguise. What do you think ?
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November 28th, 2008 at 2:28 pm
hi Pranesh,
Your article is definitely informative. However, the credit goes to the regulation that the banks have it from RBI. After the Banks Nationalisation, all the banks have stict guidelines and rules to follow.
For example: the banks are not allowed to lend money as loans by no more than 2% of the profit they made from the previous year. This is strictly checked during yearly bank budgets.
Also, if there are loans that exceed more than 2%, then one or more banks come-together to lend the money. This way there is lesser risk on the banks if there is a default.
Similarly, there are many more regulations that govern the banking system.
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