Wednesday, January 2, 2013

The Global Financial Crisis and Indian Banks: Survival of the Fittest?

NIPFP Working Paper 113

Barry Eichengreen and Poonam Gupta
December 2012


The Indian banking system was initially thought to be insulated from the global financial crisis owing to heavy public ownership and cautious management. It was thus a surprise when some banks experienced a deposit flight, as depositors shifted their money toward government-owned banks and specifically toward the State Bank of India, the largest public bank. While there was some tendency for depositors to favour healthier banks and the banks with more stable funding, the reallocation of deposits toward the State Bank of India in particular cannot be explained by these factors alone. Nor can it be explained by the impact of explicit capital injections by the government into some public-sector banks. Rather it appears that the implicit guarantee of the liabilities of the country’s largest public bank dominated other considerations.