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“Dear Customer, Your deposits with ICICI Bank are safe. Your bank is well capitalised with good liquidity. Please do not listen to baseless rumours.” India’s largest bank in terms of market capitalisation must have understood how deadly rumours can be on this particular day when they were forced to send an SMS to all its customers to save itself from a crash in terms of the market price of its shares and in terms of liquidity. The crisis started on September 29, 2008 when rumours spread of ICICI Bank going bankrupt due to its losses on account of exposures to Lehman Brothers and the US sub prime crisis. Customers rushed to withdraw their deposits from the bank’s ATMs. Share prices dipped 14% in a day to a 52 week low of Rs.483. Not only that, these rumours also ensured that the bank lost its position to HDFC Bank for a couple of days in the Nifty.
Following the near mad rush the central bank, RBI, had to intervene and assure the depositors about the health of the bank. But rumours continued to batter ICICI’s share prices. And therefore ICICI had to lodge a complaint in the Economic Offences Wing of the Mumbai Police against major brokers. The complaint even includes the name of Motilal-Oswal Securities.
The ongoing crisis raises several questions and issues about the fragility of the financial system as a whole. It is worth analysing because its implications are not limited to ICICI bank alone. Post US subprime crisis, confidence in the banking industry as a whole has been lowered. But the whole Indian banking system is largely unexposed to the ongoing derivatives crisis in US. The stringent regulations in Indian banking sector which have made the cost of banking among the highest in India have worked in its favour.
ICICI Bank too seems to be in a very sound financial position. Its capital adequacy ratio (CAR) [a measure of how much risk the banks can absorb] is still hovering at 13.97%. This is much higher than the 9% CAR that banks are required to maintain under Basel-II norms. The CAR is also higher than the present CARs of other major Indian banks, including the SBI. Its exposure to the US crisis is limited to that of its London subsidiary, ICICI Bank UK Plc alone. ICICI bank UK holds 57 million euro of senior bonds of the now bankrupt investment bank, Lehman Brothers. But despite this 98% of its non-India investment is rated investment grade.
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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