Indian banks sheltered from raging financial storm

Mumbai: Indian banks may be relatively sheltered from the direct impact of global credit turmoil, but they are fighting rising loan defaults amid a liquidity crunch that could hit profits.

Leading private sector bank ICICI Bank has so far borne the brunt of investor concerns about its exposure to the financial crisis, repeatedly stressing it was solvent and deposits were safe since Lehman Brothers filed for bankruptcy protection in mid-September.

While bad debts are expected to rise in coming months, authorities from the prime minister down have declared Indian banks to be safe.

In September, the central bank put out a statement saying ICICI was well capitalised as customers in some parts of the country queued to withdraw deposits. But ICICI's shares have still lost 70 percent of their value so far this year as investors fear the worst.

"If a bank faces a liquidity crunch, it is serious trouble. Some of the overseas institutions fell not because they did not have assets but because they did not have liquidity to fund the assets," said A.K. Purwar, a former chairman of State Bank of India, India's largest bank.

"In India, despite the mandatory requirements, it has happened so many times before."

On Monday, top Indian lender State Bank of India is expected to post a 16 percent profit rise on solid loan growth, while ICICI is likely to report earnings slipped for the second consecutive quarter. But all eyes will be on ICICI's exposure to bonds linked to Lehman and other soured credit.

India's banking system is dominated by government-run banks, and they account for about 70 percent of assets and liabilities. All banks have to hold nearly one-third of their deposits in government bonds and as cash reserves with the central bank.

Since 1969, India has not allowed a bank to collapse, merging at least two dozen troubled lenders with stronger, mostly state-run banks.

Indian banks' total exposure to failed Western banks amounted to $1 billion (Dh3.6 billion), a fraction of their total loan book of $510 billion at end September, said central bank data.

"Indian banks do face headwinds, though it is not a worrying or dire situation now," said Ritesh Maheswari, senior director of Asia Financial Institutions Ratings at Standard & Poor's in Singapore. "But if the credit crisis is prolonged it could have limited liquidity constraints on Indian banks and many others in the region will also face similar issues."

Indian banks had outstanding loans of $510 billion and total deposits of $690 billion at end-September, according to central bank data.