With the global
financial crisis spreading through Europe and Asia, it is time to objectively analyse where India stands.
The Governments of the US and European countries have already announced bail out packages to save their sinking economies. Taking a cue from them our own Reserve Bank of India has announced various measures, including drastic reduction in CRR, to inject liquidity in the market. However, it is our share market that has taken the biggest hit.
Nonetheless there is hope. We must understand that there is a marked difference between the
Indian economy and those of the US and Europe. The present
financial turmoil began with the sub-prime crisis in the US, wherein American financial institutions gave away trillions of dollars of bad home loans without considering the repaying capacity of the borrowers.
The inability of the American people to repay their loans led them to ask for extensions, and in many cases it led to the financial institutions acquiring their houses. But given the slowdown in the US economy, nobody was willing to buy these houses. As a result the financial institutions were stuck with billions of dollars worth of securities but zero liquidity. This in turn forced investors to pull out and, subsequently, Wall Street came crashing down.
On the other hand, conditions in India are much different and much better. Loans that are given by Indian banks are absolutely solid. Though it's correct that sometimes Indian banks also indulge in unsafe lending, such loans normally don't exceed more than five to seven percent of the total loans given out by the banks. These Non Performing Assets are also not completely bad debts. Indian banks may face criticism for their bureaucratic style of working with too much paper work, but they don't lend without solid collateral and good credit-worthiness.
Apart from this Indian banks have to mandatorily keep a major portion of their deposits with the Reserve Bank of India. These funds can then accordingly be released in case there is a liquidity crunch. With comprehensive regulatory mechanisms and sound banking practices, Indian banks are in no danger of going under