Brazil, Russia, India and China, popularly called together
as BRIC countries, are increasingly becoming the centre of attraction for the
rest of the world. The factors which led to it are the strong and growing
market, steady growth even in the crisis period, strong financial system and
banking environment and demographics. The banking sector, which drives the
economy has been steady and evolving continuously. The Asian Financial Crisis
of 1997 along with other macroeconomic factors had led the banking industry of
emerging markets to open up and increased control of their state owned banks.
Indian Banking
Sector
Indian Banking sector has evolved over the period of time.
The nationalization of banks in 1969 and the liberalisation of the economy in
1991 were the turning points in the overall banking sector. Since then, it has
been one of the strongest and stable banking sector in the world.
With globalization and growing needs of the economy, there
has been changes proposed to improve the efficiency of the banking sector in
all forms. The latest RBI report on “Banking structure in India- The way
forward” deals with the following changes:
- Small Banks—Small local banks
play an important role in giving credits and loans to SMEs and agricultural and
banking services in unbanked and under-banked regions. These are the preferred
vehicles to financial inclusion. This is similar to the community banks in the
US which account for 46% of the total loans to small businesses. Small banks
system would entitle more and more people to access the benefits of the
financial services in our country.
- Universal Banking—A combination
of commercial banking, investment banking, development banking, insurance and
other financial activities. Conversion of banks into universal banks would bring
in the benefits of Investor’s trust, Resource Utilization, Economies of Scale,
Profitable Diversification and one stop shopping for all financial services.
- Foreign banks in India— Foreign
banks with required balance sheet size and deposits could convert themselves
into wholly owned subsidiaries. However, this is not mandatory for new banks
wanting to establish their branches in India. The presence of foreign banks
would increase the competition and efficiency of the entire banking structure.
The merger and acquisitions in the banking industry is also allowed to the
investor’s interests.
- Reorientation of the banking
structure—This would comprise of four tiers. The first tier would comprise of
large Indian banks and some foreign banks as well. The second tier would
consist of mid-sized banks including niche banks with economy wide presence.
The third tier would encompass old private sector banks, rural banks and
regional banks. The fourth tier would have small privately owned banks and
cooperative banks.
Banking in China
China’s largest banks called the Big Four namely Industrial
and Commercial Bank of China, Bank of China, Agricultural Bank of China and
China Construction Bank are under state control. Post 2000, Chinese banks have
had the policy of easy credit. After the 2008 recession, Chinese banks gave out
huge loans using the easy credit policy. This was done to boost the real estate
sector.
The evolving structure of banking in China talks mostly of
the shadow banking. It is the system of credit intermediation that involves
entities and activities outside the regular banking system.
- It involves direct lending to
the real sector and shadow banks are closely tied to commercial banks.
- It fostered the needs of the
traditional banking which could not have been done under the strict rules and
regulations. It played an important role in the growth of entrepreneurial
activities between 1990 and 2000. However, post crisis growth in this system is
raising concerns.
- Liberalization of interest
rates—This provides access to cheap capital which is becoming increasingly
important for the Chinese industries and small enterprises. It would also
encourage banks to get into risky deals which have higher rate of returns and
would motivate households to deposit at a better rate of return.
Russian Banking
System
Russian Banking system consists of three segments—State
controlled banks, domestic private banks and foreign banks. State controlled
banks provide loans to the real estate sector, attract
the external loans and the risks of their bankruptcy is near zero. Domestic
private banks are affiliated with the industries and enterprises. They have to
conduct aggressive interest rate policies to compete with the state owned
banks. Thus, the structure of their assets is shifting to risky financial
instruments. Foreign banks have a positive reputation on the domestic market
between the client and legal clients. They give large credits to individuals.
The
potential growth in Russian banking will be in strengthening the state controlled
and foreign banks. It is not taking steps to deal with the following which
forms a part of the evolution:
- Improving the low capitalization
of the banking system.
- Improving the short term
structures of the baking liabilities to provide medium and long term loans to
the real sector.
- Improving the “interbank trust”
between the national banks to strengthen the domestic financial system.
Brazil Banking
System
The banking sector is composed of mainly domestic
institutions and domestic institutions with foreign partnership. Over the past decade, financial sector assets more
than doubled owing to the stable economy, the expansion of the securities and
derivatives markets, and money pouring in from institutional investors from
home and abroad. Rapid credit
expansion in recent years has supported domestic economic growth and broader
financial inclusion, but could also create vulnerabilities.
The banking system is now implementing
reforms to mitigate these risks:
- Issue
regulations on credit bureaus to ensure widely available information about
borrowers’ creditworthiness.
- Tighten the
criteria for providing assistance to banks, and ensure a secure and adequate
source of funding in case of a crisis.
- Shifting the
role of state owned banks towards supporting capital market development through
crowding-in private sector finance.
Thus, few things which are common to the evolving banking
structures in emerging markets are:
- Foreign banks participation
- Privatization of some state
owned banks
- Mergers and Consolidations of
domestic banks
- Subsidiaries of foreign banks
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This article has been chosen as the best article in Finance for EMpression as part of EMergeon
Written by Prakhar Maheshwari, IMT Hyderabad