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• Failure of Northern Rock: What India can learn?

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  Amarendra Dhiraj    Group moderator

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  Failure of Northern Rock: What India can learn?

  The Fed cuts its yardstick interest rates - and by 50 basis points. The markets move up and down with each episode in the ongoing account of the crisis.
  The failure of Northern Rock [http://www.northernrock.co.uk/], a British mortgage lender, was a bare reminder of the lack of enthusiasm for risk in the financial markets but it also showed up a blemished business model
  It did not want to go down the costly and time-consuming route of investing in a larger branch network. It thought there was an easier option: the wholesale market for securitisation of its loan portfolio. According to the Financial Times, 43% of the bank’s funding came from securitisation compared to the UK average of 7%. This appears a terrific strategy when the going is good but it also means curtains when the going gets tough
  
  There is a more salient point one could make. One of the strengths of the Indian banking system is that deposits are a high proportion of liabilities - the proportion is among the highest in the world. Deposits are not only cheaper than market borrowings, they tend to be a far more stable source of funds.
  
  Retail deposits, in particular, are the backbone of many a successful bank just as retail assets make for a steady stream of income. This must explain why foreign banks, with all their strengths in fee income and in cross-border transactions, have their eyes firmly set on the Indian retail segment in the run-up to 2009. As financial inclusion has not proceeded far enough, the retail market can be expected to remain a source of strength for the Indian banking system in the foreseeable future. The Indian system thus enjoys a measure of insularity from the vagaries of the financial market on both the asset and liabilities side.
  
  RBI have made the point that the Indian banking system is largely insulated from the present crisis, thanks to its negligible exposure to subprime assets!!!!!!
  
  • 21 Sep 2007, 2:11 pm
  Amarendra Dhiraj wrote: > The Fed cuts its yardstick interest rates - and by 50 basis points. > The markets move up and down with each episode in the ongoing account > of the crisis. > The failure of Northern Rock [http://www.northernrock.co.uk/], a > British mortgage lender, was a bare reminder of the lack of > enthusiasm for risk in the financial markets but it also showed up a > blemished business model > It did not want to go down the costly and time-consuming route of > investing in a larger branch network. It thought there was an easier > option: the wholesale market for securitisation of its loan > portfolio. According to the Financial Times, 43% of the bank’s > funding came from securitisation compared to the UK average of 7%. > This appears a terrific strategy when the going is good but it also > means curtains when the going gets tough > > There is a more salient point one could make. One of the strengths > of the Indian banking system is that deposits are a high proportion > of liabilities - the proportion is among the highest in the world. > Deposits are not only cheaper than market borrowings, they tend to be > a far more stable source of funds. > > Retail deposits, in particular, are the backbone of many a successful > bank just as retail assets make for a steady stream of income. This > must explain why foreign banks, with all their strengths in fee > income and in cross-border transactions, have their eyes firmly set > on the Indian retail segment in the run-up to 2009. As financial > inclusion has not proceeded far enough, the retail market can be > expected to remain a source of strength for the Indian banking system > in the foreseeable future. The Indian system thus enjoys a measure of > insularity from the vagaries of the financial market on both the > asset and liabilities side. > > RBI have made the point that the Indian banking system is largely > insulated from the present crisis, thanks to its negligible exposure > to subprime assets!!!!!!