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Financial Stability of India - Stability of Indian Banking System

Updated on July 14, 2011
US President Barack Obama with Indian Prime Minister Manmohan Singh in India
US President Barack Obama with Indian Prime Minister Manmohan Singh in India | Source

Some four years back, I used to hear my colleagues crying about the pain of taking a loan from SBI. "Yes. Unnecessary bureaucracy" - I then thought. However, in the light of the collapse of all those banks that gave hassle free home loans, the foundations of the nationalized banks in our country has been proved the right one. The US banking system, though technically more advanced, with more precise information on each and everyone's creditworthiness, ultimately ended up as a failure, though the initial bubble had cast doubts on whether we must re-consider the “conservative’ business of our own national banks. We can still eliminate the unnecessary bureaucracy in our banks, but must not deviate from the fundamentals for short term profits. Further, building advanced information systems, with private participation, on tracking an individual's credit history will be vital in the future. While the banking system abroad was too liberal and market oriented, Indian banking system tried to have it in a controlled environment. This suffocated many and was blamed to be too bureaucratic.

But it all paid very well. When US banks collapsed with heavy backlog of bad mortgage loans, massive defaults in credit card payments, and much more, our strict settings helped Indian banking systems to survive from the crisis. So there are different reasons for financial stability of India and stability of Indian banking system as a whole. Mostly we should thank RBI for the strict regulations.

  • In India, banks lending to individual is based on their income. The banks do religiously verify an individual’s income and expenditure before sanctioning any loans.
  • Mortgage loan still insists on down payment (15% to 30%) and this prevented many who dreamt of having properties completely at bank’s expense.
  • 70% of the banks in India re still nationalized.
  • RBI issued market stabilization schemes and bonds and absorbed dollars; now if overseas investors suck out dollars after selling shares, there is no shortage of dollars to sell to them; and, there will be no domestic liquidity crisis because the RBI can buy back those bonds and pump rupees into the market.
  • RBI has made banks keep 7.5 per cent of their deposits in cash, and another 25 per cent of their deposits in government bonds. So even if there were to be a run on a bank they still would have the liquidity to tackle the situation.
  • RBI insists the bank to keep the capital ratios within the range of 11% to 13% (Regulation is 9 %)
  • Indian banks are not focusing on the business structure like securitization and collateralized debt obligation (CDO) – Again thanks to RBI regulations.
  • Another crucial factor RBI had the right person in the right job at right time. He was Y V Reddy, the former RBI governor (6th Sept 2003 to 5th Sept 2008). He made sure that Indian banks did not get too caught up in the bubble mentality.
  • Last but not the least -Culture – Indians are not very comfortable with credit. Indians generally think, “if you spend more than you earn, you will get in trouble“. In India, joint families still exist and family members help each other in times of economic crisis so they don’t go to banks to borrow money.

So above are the reasons for financial stability in India and stability of Indian banking system and I think these are some reasons why President Barack Obama and first lady Michelle Obama visited India supporting US India financial and economic partnership, membership of India in multilateral export control regimes, taking help of India for creation of jobs in America, national export initiative, and many more things.


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    • vocalcoach profile image

      Audrey Hunt 7 years ago from Idyllwild Ca.

      Highly interesting hub. Thank you. Rated up!

    • soni2006 profile image

      Rajinder Soni 7 years ago from New Delhi, India

      Thanks a lot jacobkuttyta for your comment.

    • jacobkuttyta profile image

      jacobkuttyta 7 years ago from Delhi, India

      Yes, it was very difficult to get home loans from the nationalized banks. It saved Indian banks from credit crisis.