Page 47 - Banking Finance August 2021

ARTICLE

may be able to speculate in terms of fixing the forward In the pre covid situation, our economy was still sluggish and
spreads unbeknownst to the buyer. Also this shall give recessionary trends were setting in. The covid outbreak has
rise to arbitrage opportunities and soon the purpose of only accelerated it. With the economy shrinking by the day,
'investing for a lifetime' will convert into speculative the banks wouldn't want to burn their fingers further as
trading. they are already reeling under the burden of rising NPAs.
The capital infusion plan of the government Vis a Vis the
Y Moral hazard - With the presence of a forward contract, provisioning that the banks have had to make are not
central guarantee fund, letter of credit etc. the due congruent.
diligence will be diluted on both fronts i.e. buyer and
seller. Consider an example where an insurance To assess the risks of an unfamiliar market would involve
company is giving away motor insurance policies at thorough investigations by RBI and banks, before coming up
attractive rates with all features like comprehensive with strictures and guidelines. Some of the existing
insurance and unlimited zero depreciation. A motorist guidelines would also have to be tweaked like large exposure
may drive recklessly not worrying too much about the framework, credit value adjustments, IRAC to name a few.
costs involved to mend the damaged vehicle because
of the insurance coverage. In an emerging market like ours, the in equal distribution of
income and thus resultant opportunities may not be
Y Adverse Selection - Let's assume a bank that wants to conducive to introduce new derivative products or existing
capture the credit card market base may offer credit ones in new markets. The Global Financial Collapse during
cards to all individuals merely on the basis of some KYC 2007-08 has been a testimony to the fact that despite
documents without assessing the credit worthiness. This CDO's, CBO's and CDS's being very popular then, Indian
is part of penetrative pricing to increase subscription markets never got adventurous. The same can also be said
base. Over a period of time, the delinquencies will affect about the acceptance of crypto currency in India. Our
the expansion plans of the bank and it will have to shut inherent wisdom of thinking wisely before taking a leap has
or hive off it credit card arm. A similar thought can be so far insulated us from major setbacks even in the era of
applied to Futures where brokers and banks in order to globalization.
boost their income might fall into this trap. Very similar
to what happened in subprime crisis where banks However to constantly evolve and accept change is a
jumped in to the bandwagon without understanding the cornerstone for survival in the rapidly changing business
environment. The day isn't far when foreign banks will have
consequences.
their hands untied and then the changing dynamics will be
felt. What the credit card and retail liabilities segment have
Its curtains!
experienced over the years, the entire credit product line
Indian financial and commodity markets have evolved over soon will.
the years but may not have been in the same space as
advanced markets. A conservative approach by the The Indian banks have long been market followers and may
regulators like RBI and SEBI have held us in good stead. Not be its now time that they came out with offerings that the
to forget the famous decoupling theory during the subprime universal banking fraternity sits up and take notice of! We
crisis when the Indian markets and economy were better have already made enormous leaps in fields like pharmacy
off than most advanced economies. and space research and may be banking is next in queue.
While it may appear premature now, but the conception of
One of the most revered investors Mr. Warren Buffet had ideas and the power of imagination has brought us this far
famously remarked that "derivatives are financial weapons and thus going the next mile is certainly in the offing!
of mass destruction". The underlying meaning of the
statement is that improper assessment of derivatives can The views presented are solely of the author's and the
cause mayhem beyond one's control. organization bears no responsibility.

BANKING FINANCE | AUGUST | 2021 | 47