Abstract
We foresee India following the rest of the world in entering a period of
below-trend growth (estimated at
between 7.0-7.5%) in 2009 after a series
of boom years in which large capital inflows pressed GDP
growth to 9.0%
and beyond. While the Indian economy is less reliant on external demand than
its East
Asian neighbours, reduced capital inflows will have a marked
effect on domestic consumption and
investment levels. With the leeway for
increased government spending impaired by India’s chronic fiscal
deficits it will be more reliant on monetary stimulus. While India’s
solid macroeconomic fundamentals
bear promise of continued strong growth
over the long term, we believe trend growth will be hampered
by inadequate
investment in education and infrastructure.
This report is being written
at a time when the global financial crisis, which arose as a result of the
evaporation of inter-bank liquidity, has moved into a new phase. Stock market
participants appear,
reasonably, to have taken the view that the policy
responses taken by governments, central banks and
multi-lateral
institutions will be sufficient to prevent a total collapse of the global
financial system.
Instead, stock market participants are focusing on the
impact of a near-global recession on the earnings of
non-financial
companies.
The number and size of stand-by facilities agreed by the IMF
since early October supports our view that,
of the emerging markets whose
commercial banking sectors are surveyed by BMI, the countries of
Central
and Eastern Europe are those whose economies are most at risk of suffering
adverse affects as a
result of the global financial crisis. This is partly
because the macroeconomic imbalances are relatively
severe and partly
because the Central and Eastern European countries are more directly affected
by the
brutal recession that is unfolding in wealthier member states of
the EU.
As yet, it has not been possible to collate hard numbers, for most
of the countries whose commercial
banking sectors are surveyed by BMI,
that clearly quantify the impact of the global financial crisis on the
banks. As we explain in the section that discusses changes that we are making
to the report, we again
include a lengthy essay which attempts to identify
the key issues. In essence, in the emerging markets –
and, indeed,
the developed countries – of the Asia-Pacific, commercial banks appear
well placed to deal
with the crisis. The same is, broadly, true of
commercial banks in the various countries of the Middle East
and North
Africa. Latin America, Chile, Brazil, Mexico and Colombia appear better placed
than
Argentina, Venezuela, Bolivia and Ecuador. South Africa’s
situation appears to have much in common
with that of Brazil. In contrast,
Nigeria faces some of the same challenges as those that confront
Venezuela. The positions of most countries in Central and Eastern Europe,
however, are alarming.
From Q209, we will include data that pertains to
late 2008 and extend forecasts out to 2013. We will also
incorporate much
greater discussion of the various protagonists in each country’s
commercial banking
sector and a number of new features. We believe that
the figures we compiled in mid-2008 provide
insights as to how the various
commercial banking sectors will fare in the current, extremely uncertain,
climate. We have, therefore, left them essentially unchanged.
The figures
on the tables above provide a snapshot of the banking sector in India prior to
the onset of the
global financial crisis. To place the figures in context,
it may be useful to bear in mind certain aspects of
the 59 countries whose
banking sectors are currently surveyed by BMI. Across this sample, the
median
growth in assets in local currency terms was 21.3% (in Colombia),
the median loan growth was 21.6% (in
India) and the median growth in
deposits was 17.9% (in Brazil).
On their own, the ratios of loans to
deposits, assets and GDP mean little. However, they can provide
useful
hints when combined with other data. Across the 59 countries, the median
loan/deposit ratio is
92.3% (in Greece), the median loan/asset ratio is
56.0% (in Poland) and the median loan/GDP ratio was
63.9% in India.
As
in previous reports we include a SWOT analysis for India. The story remains
one of a potentially
enormous banking system held back by slow structural
reform and a large number of people too poor to
require its services. In
the short tern, an air of caution prevails. The Reserve Bank of India (RBI)
has
tightened policy as a pre-emptive strike against inflation and the
banks have been less than aggressive in
their lending. The loan/deposit
and loan/asset ratios have been falling in India.
Since Q108, we have
calculated, on a consistent basis, a Commercial Bank Business Environment
Rating
(CBBER) for each of the 59 countries surveyed. The CBBER includes
an assessment of the limits of
potential returns. It does this by taking
into account the size, growth potential and bancassurance potential
of the
banking sector, as well as aspects of the economy in 2007. The CBBER also
depends on an
assessment of the risks to the realisation of potential
returns. This reflects BMI’s assessments of overall
country risk,
together with the regulatory and competitive environment.
India’s
overall CBBER, at 58.6, is towards the middle of the countries in the
Asia-Pacific region surveyed
by BMI. However, this is largely due to the
comparatively high 76.3 score on the heavily weighted
banking market
elements of the limits to potential returns element. This is probably more
reflective of the
sheer scale and entrenched position of the Indian
banking system rather than any high level of
development.
This report
also includes a detailed examination of the factors that will drive Islamic
banking through
2009.
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