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Impact on the Indian Banking System

One of the key features of the current financial turmoil has been the lack of perceived contagion being felt by banking systems
in EMEs, particularly in Asia. The Indian banking system also has not experienced any contagion, similar to its peers in the rest of Asia.

A detailed study undertaken by the RBI in September 2007 on the impact of the sub-prime episode on the Indian banks had revealed that none of the Indian banks or the foreign banks, with whom the discussions had been held, had any direct exposure to the sub-prime markets in the USA or other markets. However, a few Indian banks had invested in the Collateralized Debt Obligations (CDOs) / bonds which had a few underlying entities with sub-prime exposures. Thus, no direct impact on account of direct exposure to the sub-prime market was in evidence. However, a few of these banks did suffer some losses on account of the mark-to-market losses caused by the widening of the credit spreads arising from the sub-prime episode on term liquidity in the market, even though the overnight markets remained stable.

Consequent upon filling of bankruptcy under Chapter 11 by Lehman Brothers, all banks were advised to report the details of their exposures to Lehman Brothers and related entities both in India and abroad. Out of 77 reporting banks, 14 reported exposures to Lehman Brothers and its related entities either in India or abroad. An analysis of the information reported by these banks revealed that majority of the exposures reported by the banks pertained to subsidiaries of Lehman Bros Holdings Inc., which are not covered by the bankruptcy proceedings. Overall, these banks' exposure especially to Lehman Brothers Holding Inc., which has filed for bankruptcy, is not significant and banks are reported to have made adequate provisions.

In the aftermath of the turmoil caused by bankruptcy, the Reserve Bank has announced a series of measures to facilitate orderly operation of financial markets and to ensure financial stability which predominantly includes extension of additional liquidity support to banks.

Impact on IT Sector

The air of pessimism of a possible slowdown of the US economy has been a cause of concern for the Indian IT industry at large. Most Indian IT service providers generate more than 50% of their revenues from the US market, and it is natural that a possible slowdown will impact their revenues, either directly by a shift in the demand of IT services from specific industries in the US, or indirectly by a shift of investments to other favorable markets and assets.

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* Contributed by: -
Sunil Kumar Panda,
PGDBM, 1st Semester,
Fortune Institute of International Business, New Delhi.
Article posted on Fenruary 14, 2009.