The ownership structure of Indian banking system that is largely in government control is likely to insulate the country’s banks from falling into a possible tailspin, similar to some of their global peers.
Almost 80 per cent of the banking system in India is in the hands of the government. Public sector banks are highly regulated in terms of the kind of exposures that they can get into, forcing them to go through a series of checks and balances.
There are, however, some private sector banks that have got some exposure abroad which has turned sour. ICICI Bank, for example, has an exposure of $80 million in senior bonds of Lehman Brothers.
Experts said traces of sub-prime lending in the Indian banking system can be found in the Indian banking system as well, particularly in credit cards.
“The credit card default has risen to 7-8 per cent,” said an expert who did not wish to be named.Sub-prime, refers to a loan given to a borrower who does not qualify for a regular home loan, because of a poor credit record, low income and no job security.
A senior government official said the government and Reserve Bank of India (RBI) will be shortly bringing out, shortly, a comprehensive report of the committee on financial sector assessment.
Authorities are concerned about rising instances of foreign venture funds investing in domestic funds, which as resident entities do not need to comply with guidelines applicable for foreign direct investment (FDI) in the realty sector, the official said.
The real estate sector has emerged among preferred investment avenues for venture capital investors with sector alone attracting 20 per cent of the total investments made through these funds.
Of the overall investments of Rs 103,470 crore in nine different categories, real estate attracted more than Rs 20,000 crore investments during the last fiscal.
The matter also came up at the meeting of the high level coordination committee on financial markets chaired by the former RBI governor YV Reddy last month.
The official said foreign venture funding and implications asset price bubbles and speculative gains were discussed at the meeting that was attended by then finance secretary and present RBI governor D Subbarao and C Bhave, chairman, Securities and Exchange Board of India (SEBI), chairman among others.
“The current global turmoil is a lesson for the Indian banking system and banks should remain cautious of such aggression and investments,” said Ashwin Parekh, national head, financial services, Ernst & Young.
The RBI in its latest currency and finance report has called for a more active role of supervisors to scrutinise the risk management practices and should encourage developing more robust models for monitoring internal processes and managing risk.