INTERPRETING MALADIES

The recent bankruptcies of lenders around the world have many lessons for India’s resilient banking sector

- ANAND ADHIKARI

THE RECENT GLOBAL banking debacles have highlighted the robustness of India’s ₹216-lakh crore banking industry. But there are important lessons there for India’s banking sector as well. The crisis has brought to the fore factors such as portfolio concentration, liquidity risk, the superiority of equity over additional tier-1 (AT1) bonds—a kind of debt issued by a bank that can be converted into equity if its capital levels fall below requirements—as well as market risks.

The emergency credit lines opened by regulators also raise questions about the role of governments and regulators in rescuing stressed banks. “Every crisis gives us a new regulatory blueprint,” says a private sector banker who wishes to remain anonymous. Banks have a lot to deal with—from risk management to credit to liquidity to market risks by moderating the expectations of equity shareholders. “They [banks] should address portfolio diversification, growth in the intrinsic net worth of their assets, quality of credit, market risk in terms of measurement of assets’ sensitivity to interest rate movements and funding risks, especially depositors leaving as quickly or quicker than when they came in,” says Monish G. Chatrath, Managing Partner of MGC Global, a risk advisory firm.