The banks faced the consequences of believing that the credit boom will go on forever which resulted in banks giving more and more “suicide loans” ranging to 120% of the house value (Macwhirter, 2008). The regulators like Financial Services Authority (UK) and the Federal Deposit Insurance Corporation (US) were unable to track the situation. They were in the awe of the banking sector and interpreted they knew what they were doing but their interpretation received a jolt as soon as the financial world was engulfed by the web of recession.
The Banking crisis affected almost all the countries in the world but there were some exceptions like, if we look at the Indian Banking Sector, we will see it crunched a bit at the time of the crisis, but it stood firm after that. Indian financial sector’s huge dependency on US was evident that it would be largely affected by the crisis. Many were of view that the effect would be huge. It was told that the banking sector would suffer, as the companies and the household sector in India definitely felt the pinch of the crisis in the US. (Rammohan, 2010). But unlike the US and UK the Indian banks were stronger in dealing with the situation and succeeded in it. Firstly, it was due to the ability to maintain spreads- return on advance minus cost of funds. The Indian banks have been able to do so because of the high proportion of current and savings account (Casa) deposits. The current accounts have zero interest payment and savings account has a low interest payment on them. This way the banks have been able to minimize the cost. Secondly, the banks have been able to generate income from fee-based services such as sale of mutual funds and insurance products. The large untapped customer base helps to increase the income of the banks. Thirdly, the slowdown has not resulted in the increase of provisions in the rising NPAs. The deceleration of growth rate of 9% to 7% is not a disaster. The Indian companies entered the slowdown with solid financials, which was not a bubble like that of the US. It was more of a genuine case of higher growth and demand. Fourthly, the Indian banks invested in Government securities in good proportions, which helped in maintaining profit levels at the times of crisis.