Consequent to the financial sector reforms initiated in 1991, Indian banking got a facelift with the foreign equity participation. The traditional banking system paved way to the technology-based banking. The products and dealing style changed to match international standards. Banks are now going to the customers than the customers to the banks, as was the practice a few years back. Banking industry became a profitable investment opportunity to retail and wholesale investors. The integration of Indian financial market with global market facilitated Indian banks to play in the overseas market. Consequently, the major banks created exposures abroad and when the recession in the global market could lead to substantial loss to our banks also. These sentiments played heavily resulting into the sudden crash of our stock market. Now the question is should we get panicky?
If we analyse the financial strength of our banks many of them are fundamentally strong. For example the ICICI Bank, India’s second largest bank has a capital adequacy ratio of 13.4 per cent as against the international standard of 9 per cent. Indian banks are still conservative in their lending operations. The collateral-based lending followed by Indian banks enables them to fall back on the collateral security in the event of loss of primary security. The supervisory and regulatory system in India is much stronger than that in US or UK. In India, the Reserve Bank of India is exercising close in-site and off-site supervision of the Indian and foreign banks operating in the country. There were no bank failures after the fall of Palai Central Bank in 1960 thanks to the intervention of RBI and facilitating merger with another strong bank. Bank deposits up to Rs.1 lakh is covered under the deposit insurance scheme. The banks also own assets in the form of land and buildings at prime centres. Therefore, there is no need of getting panicky on the fate of Indian banks.
Now the question is why people reacted so heavily on rumours? The answer is simple. It is the mob psychology. People do not want to test with their hard earned earnings. The so called investment advisors also has role in spreading such rumours. Their interest is that by advising to sell, they can expand their business because the investors are being saved from a further market crash. In this process they also gain because they also earn commission on the large volume transactions put through them. What happened in India recently is an excellent example to understand how sentiments can play in the stock market.
However, the market took a rebound on the assurance from RBI and Finance Minister. The government should seriously think of initiating action against such rumour mongers who are playing with the poor investors’ money.
If we analyse the financial strength of our banks many of them are fundamentally strong. For example the ICICI Bank, India’s second largest bank has a capital adequacy ratio of 13.4 per cent as against the international standard of 9 per cent. Indian banks are still conservative in their lending operations. The collateral-based lending followed by Indian banks enables them to fall back on the collateral security in the event of loss of primary security. The supervisory and regulatory system in India is much stronger than that in US or UK. In India, the Reserve Bank of India is exercising close in-site and off-site supervision of the Indian and foreign banks operating in the country. There were no bank failures after the fall of Palai Central Bank in 1960 thanks to the intervention of RBI and facilitating merger with another strong bank. Bank deposits up to Rs.1 lakh is covered under the deposit insurance scheme. The banks also own assets in the form of land and buildings at prime centres. Therefore, there is no need of getting panicky on the fate of Indian banks.
Now the question is why people reacted so heavily on rumours? The answer is simple. It is the mob psychology. People do not want to test with their hard earned earnings. The so called investment advisors also has role in spreading such rumours. Their interest is that by advising to sell, they can expand their business because the investors are being saved from a further market crash. In this process they also gain because they also earn commission on the large volume transactions put through them. What happened in India recently is an excellent example to understand how sentiments can play in the stock market.
However, the market took a rebound on the assurance from RBI and Finance Minister. The government should seriously think of initiating action against such rumour mongers who are playing with the poor investors’ money.
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