The Indian banking system is financially stable and resilient to the shocks that may arise due to higher non-performing assets (NPAs) and the global economic crisis, according to a stress test done by the Reserve Bank of India (RBI).

Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7 billion for the purchase of 200 metric tonnes of gold from the International Monetary Fund (IMF). The purchase has increased RBI’s share of gold holdings from approximately 4 per cent to about 6 per cent.

Following the recent financial crisis, new deposits have gravitated towards the public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: June 2009', nationalised banks, as a group, accounted for 49.7 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 24.2 per cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.5 per cent, 5.6 per cent and 2.9 per cent, respectively.

With respect to gross bank credit also, nationalised banks hold the highest share of 50.4 per cent in the total bank credit, with SBI and its associates at 23.5 per cent and other scheduled commercial banks at 18.0 per cent. Foreign banks and regional rural banks had a share of 5.7 per cent and 2.4 per cent respectively in the total bank credit.

The report also found that scheduled commercial banks served 34,676 banked centres. Of these centres, 28,167 were single office centres and 62 centres had 100 or more bank offices.

The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI deposits have increased by nearly US$ 3.7 billion in the first four months of 2009-10, despite the volatile movements in the interest rates. NRI fund inflows increased since April 2009 and touched US$ 45.33 billion till July 2009, as per the RBI's September bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to US$ 281.861 billion as on October 9, 2009 as against US$ 253.0 billion in April 10, 2009.

India has finalised negotiations for a US$ 2 billion loan from the World Bank to help recapitalise state-run banks.

Major Developments

A robust increase in non-interest income has helped the SBI post a net profit of US$ 530.6 million in the second quarter ended September 30, 2009, up 10 per cent from the corresponding period last year. The bank has been growing its savings bank deposit base at the rate of US$ 1.07 billion a month in the last few months, in a bid to grow low-cost deposits and shed high-cost term deposits. This is expected to improve net interest margin by 10-15 basis points in every quarter. The SBI is adding 23 new branches abroad bringing its foreign-branch network number to 160 by March 2010. This will cement its leading position as the bank with the largest global presence among local peers.

Amongst the private banks, Axis Bank’s net profit surged by 32 per cent to US$ 115.4 million on 21.2 per cent rise in total income to US$ 852.16 million in the second quarter of 2009-10, over the corresponding period last year. HDFC Bank, the country’s second largest private sector lender, reported a 30.21 per cent rise in its quarterly net profit, helped by non-interest income.

For the quarter ended September 2009, ICICI Bank reported a 2.6 per cent jump in net profit at US$ 222.1 million from US$ 216.5 million in the same period a year-back. ICICI Bank has raised US$ 750 million through a five-year bond issue at its Bahrain branch.

YES Bank, a new private sector bank, has inked pact with Proparco, a French financing agency, to raise US$ 20 million capital through subordinated bonds to enhance capital adequacy.

Government Initiatives

In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on June 25, 2009, said that banks should link more branches to the National Electronic Clearing Service (NECS). Ideally, all core-banking-enabled branches should be part of NECS. NECS was introduced in September 2008 for centralised processing of repetitive and bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in NECS.

In the Second Quarter Review of Monetary Policy for 2009-10, RBI observed that the global economy was showing incipient signs of recovery and the prospects for the domestic economy were improving.

To aid the financial recovery, the RBI has introduced a substantial reduction in policy rates since October 2008: the repo rate by 425 basis points and the reverse repo rate by 275 basis points. The CRR was also reduced by 400 basis points.

Banks used the ample liquidity available with them to make large investments in government securities and also fairly sizeable investments (of the order of US$ 19.59 billion during the current financial year so far) in units of mutual funds.

According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be to:

• Keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments to stabilise inflation expectations.
• Monitor the liquidity situation closely and manage it actively to ensure that credit demands of productive sectors are adequately met while also securing price stability and financial stability.
• Maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process.

Meanwhile, the RBI has restored the Statutory Liquidity Ratio (SLR) back to 25 per cent on October 27, 2009, which was reduced to 24 per cent in November 2008.

The money supply (M3) growth on a year-on-year basis at 18.9 per cent as on October 9, 2009, remained above the indicative projection of 18.0 per cent set out in the First Quarter Review of July 2009. The main source of M3 expansion was bank credit to the government. reflecting large market borrowings of the Government.

Exchange rate used:
1 USD = 46.9 INR (as on October 2009)
1 USD = 46.8 INR (as on November 2009)