INTRODUCTION

The global financial crisis originated in United States of America. During booming
years when interest rates were low and there was great demand for houses,
banks advanced housing loans to people with low credit worthiness on the
assumption that housing prices would continue to rise. Later, the financial
institutions repackaged these debts into financial instruments called
Collateralized Debt Obligations and sold them to investors world-wide. In this
way the risk was passed on multifold through derivatives trade. Surplus inventory
of houses and the subsequent rise in interest rates led to the decline of housing
prices in the year 2006-07 which resulted in unaffordable mortgage payments
and many people defaulted or undertook foreclosure. The house prices crashed
and the mortgage crisis affected many banks, mortgage companies and
investment firms world-wide that had invested heavily in sub-prime mortgages.
Different views on the reasons of the crisis include boom in the housing market,
speculation, high-risk mortgage loans and lending practices, securitization
practices, inaccurate credit ratings and poor regulation of the financial
institutions. The financial crisis has not only affected United States of America,
but also European Union, U.K and Asia. The Indian Economy too has felt the
impact of the crisis to some extent. Though it is difficult to quantify the impact of
the crisis on India, it is felt that certain sectors of the economy would be affected
by the spillover effects of the financial crisis.

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METHODOLOGY
The present study focuses on

• The origin and causes of global financial crisis

• The impact of the crisis on the Indian economy.

RESULTS AND DISCUSSION

Reasons for Financial Crisis

The first hint of the trouble came from the collapse of two Bear Stearns hedge
funds early 2007. Subsequently a number of other banks and financial
institutions also began to show signs of distress. Matters really came to the fore
with the bankruptcy of Lehman Brothers, a big investment bank, in September
2008. The reasons for the crisis are varied and complex. Some of them include
boom in the housing market, speculation, high-risk mortgage loans and lending
practices, securitization practices, inaccurate credit ratings and poor regulation.

Boom in the Housing Market

Subprime borrowing was a major contributor to an increase in house ownership
rates and the demand for housing. This demand helped fuel housing price
increase and consumer spending. Some house owners used the increased
property value experienced in housing bubble to re-finance their
homes with lower interest rates and take second mortgages against the added
value to use the funds for consumer spending. Increase in house purchases
during the boom period eventually led to surplus inventory of houses, causing
house prices to decline, beginning in the summer of 2006. Easy credit, combined
with the assumption that housing prices would continue to appreciate, had
encouraged many subprime borrowers to obtain adjustable-rate mortgages which
they could not afford after the initial incentive period. Once housing prices started
depreciating moderately in many parts of the U.S, re-financing became more

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difficult. Some house owners were unable to re-finance their loans reset to higher
interest rates and payment amounts. Excess supply of houses placed significant
downward pressure on prices. As prices declined, more house owners were at
risk of default and foreclosure.

Speculation
Speculation in real estate was a contributing factor. During 2006, 22 per cent of
houses purchased (1.65 million units) were for investment purposes with an
additional 14 per cent (1.07 million units) purchased as vacation homes. In other
words, nearly 40 per cent of house purchases were not primary residences.
Speculators left the market in 2006, which caused investment sales to fall much
faster than the primary market.

High- Risk Mortgage Loans and Lending

Practices
A variety of factors caused lenders to offer higher-risk loans to higher-risk
borrowers. The risk premium required by lenders to offer a subprime loan
declined. In addition to considering high-risk borrowers, lenders have offered
increasingly high-risk loan options and incentives. These high-risk loans included
“No Income, No Job and No Assets loans.” It is criticized that mortgage
underwriting practices including automated loan approvals were not subjected to
appropriate review and documentation.

Securitization Practices:
Securitization of housing loans for people with poor credit- not the loans
themselves-is also a reason behind the current global credit crisis. Securitization
is a structured finance process in which assets, receivables or financial
instruments are acquired, pooled together as collateral for the third party
investments (Investment Banks). Due to securitization, investor appetite for
mortgagebacked securities (MBS), and the tendency of rating agencies to assign
investment-grade ratings to MBS, loans with a high risk of default could be
originated, packaged and the risk readily transferred to others.

Inaccurate Credit Ratings:

Credit rating process was faulty. High ratings given by credit rating agencies
encouraged the flow of investor funds into mortgage-backed securities helping
finance the housing boom. Risk rating agencies were unable to give proper
ratings to complex instruments (Gregorio 2008). Several products and financial

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institutions, including hedge funds, and rating agencies are largely if not
completely unregulated.

Poor Regulation:
The problem has occurred during an extremely accelerated process of financial
innovation in market segments that were poorly or ambiguously regulated –
mainly in the U.S. The fall of the financial institutions is a reflection of the lax
internal controls and the ineffectiveness of regulatory oversight in the context of a
large volume of non-transparent assets. It is indeed amazing that there were
simply no checks and balances in the financial system to prevent such a crisis
and “not one of the so called pundits” in the field has sounded a word of caution.
There are doubts whether the operations of derivatives markets have been as
transparent as they should have been or if they have been manipulated.

SEVERITY OF THE FINANCIAL

CRISIS
The current global financial crisis is rooted in the subprime crisis which surfaced
over a year ago in the United States of America. During the boom years,
mortgage brokers attracted by the big commissions, encouraged buyers with
poor credit to accept housing mortgages with little or no down payment and
without credit checks. A combination of low interest rates and large inflow of
foreign funds during the booming years helped the banks to create easy credit
conditions for many years. Banks lent money on the assumption that housing
prices would continue to rise. Also the real estate bubble encouraged the
demand for houses as financial assets. Banks and financial institutions later
repackaged these debts with other high-risk debts and sold them to world- wide
investors creating financial instruments called CDOs or Collateralized Debt
Obligations (Sadhu 2008). In this way risk was passed on multifold through
derivatives trade. Surplus inventory of houses and increase in interest rates led
to a decline in housing prices in 2006-2007 resulting in an increased defaults and
foreclosure activity that collapsed the housing market ( Sengupta 2008 ).
Consequently, a large number of properties were up for sale affecting mortgage
companies, investment firms and government sponsored enterprises which had
invested heavily in sub prime mortgages. Since the collateral debt instruments
had been globally distributed, many banks and other financial institutions around
the world were affected. Major Banks and other financial institutions around the
world have reported losses of approximately US $ 435 billion as on 17th July,
2008 (Onaran 2008). Thus with the failure of a few leading institutions in United
States, the entire financial system in the world has been affected. Banking and

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financial crises have been a regular feature of modern economic history.
According to one estimate, there have been 86 banking crises since the Great
Depression that have spread beyond national borders. According to a World
Bank study in 2001,2 the world has witnessed as many as 112 systemic banking
crises from the late 1970s to early 2001. Most crises, including the current one,
share some common features. Some general examples include a search for
increasingly higher yields in financial markets, a lax regulatory regime, a
mismatch in appetite for risk and the capacity for bearing it, and the consequent
build up of asset bubbles, usually in the real estate sector, which for various
reasons is overlooked by the regulators. The recent financial sector crisis shares
most, if not all, of these features. However, what makes the current crisis
exceptional is that it emerged at the very epicentre of global capitalism, the US,
and its contagion spread very quickly to the entire global economy, unlike
previous crises that were usually confined to a region or a small number of
countries. Economies like India and the People’s Republic of China (PRC),
where the financial sectors were not as integrated with the global financial
system, were spared the first round adverse effects of the current crisis and their
banks were left mostly unaffected. However, these giant economies and their
Asian neighbors could not escape the second round effects that severely
impacted their trade flows due to the collapse of output and trade in advanced
economies. The severity of the current crisis can be gauged by the steep decline
in the equity markets of advanced economies. The bursting of the sub-prime
housing bubble caused Wall Street to lose a staggering US$8 trillion in market
capitalization in a very short time (Brunnermier 2009). The financial crisis soon
morphed in to a full-fledged global economic downturn as credits markets froze,
aggregate demand in all advanced economies fell, and commodity prices
crashed, forcing exporters to shelve expenditure and lay off workers in large
numbers. Consequently, industrial production collapsed worldwide. In the last
quarter of the calendar year 2008, advanced economies and large economies
like India and the PRC witnessed a contraction in their industrial production. In
some of the major export-oriented countries like Japan, Germany, and Brazil,
industrial output contracted more than 10% during the third and fourth quarters of
fiscal year (FY) 2008. The decline in industrial output made labor retrenchment
and surging unemployment almost inevitable. According to the International
Labour Organisation’s (2009) Global Employment Trends Report more than 50
million people are expected to lose their jobs due to the crisis.
The severity and suddenness of the crisis can also be judged from the IMF’s
forecast for the global economy. During the last 10 months (July 2008 to April
2009), the IMF revised its forecasts four times, all in the negative direction. In
July 2008, it projected a growth rate of 3.9% for the world economy for 2009.
However, this figure was reduced to 2.2% in November 2008 and further to 0.5%
in January 2009. Finally in April 2009, for the first time in 60 years, the IMF
predicted a global recession with negative growth of 1.3% for world GDP in 2009.
Comparisons with the Japanese experience since the bursting of its own real
estate bubble in the late 1980s and the consequent stagnation over the 1990s
have been drawn to suggest a possible long period of weak economic activity in

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advanced economies. Initially the IMF projected a positive growth rate of 1.8%
for 2010 indicating a somewhat weak V-shape recovery. But by July 2009 this
had changed and the possible recovery in 2010 was forecast to be much
stronger. Because the recession in developed countries is expected to continue,
developing countries are anticipated to lead the global turnaround.
The fear is that the rather grim economic outlook, as reflected in the IMF
forecasts, may induce many countries to turn to protectionism to ensure sufficient
demand for their domestic industry and prevent a further rise in unemployment.
In a recent study, Gamberoni and Newfarmer (2009) found that since the onset
of the current global crisis, 17 of the 23 members of the informal G-20 grouping
that met at the Washington Summit in November 2008 have invoked
protectionism in one form or another despite agreeing to not take any new
protectionist measures. This is indeed worrisome because it will further
exacerbate the decline in global trade, which already has seen a historical
collapse since the crisis began in October 2008. Given the sharp export
contraction in the world’s major exporting economies like Germany, Japan, and
the PRC,3 the growth rate of global trade fell from 6% in 2007 to 2% in 2008
(Figure 1). Furthermore, according to the World Trade Organization (WTO),
world trade is expected decline by as much as 9% in FY2009–2010, which would
make it the biggest contraction in global trade since World War II.

Annual Growth of Global Trade Volumes 1981–2009, Actual and Forecast

Essentially, the current crisis is truly global in nature and could be referred to as
the worst crisis since the Great Depression. Fortunately, in sharp contrast to the

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experience during the Great Depression, the severity of the crisis was recognized
early on and, even more important, governments in both advanced and emerging
economies have coordinated their policy responses. Governments across the
globe have announced various fiscal stimulus packages and huge amounts of
liquidity have been injected into the system by central banks. Some countries like
South Africa and the PRC have announced mega-stimulus packages that
account for around 24.0% and 8% of their respective GDPs.4 In absolute terms,
the US has announced a bailout-cum-stimulus package of worth US$8.1 trillion.
As shown in Table 3, if we add up the stimulus packages of nine selected
countries,5 the combined total comes to around US$10 trillion, which is roughly
20% of total world GDP. Given these initiatives, it is expected that the global
economy will soon turn the corner and the recession will not be as prolonged as
it was in 1929.

IMPACT OF CRISIS ON THE

INDIAN ECONOMY
Due to globalization, the Indian economy cannot be insulated from the present
financial crisis in the developed economies. The development in the U.S financial
sector has affected not only America but also European Union, U.K and Asia.
The Indian economy too has felt the impact of the crisis though not to the same
extent. It is premature to try to quantify the consequences of the crisis on the
Indian economy. However the impact will be multi-fold.

Global Integration of Indian Economy

In response to its balance of payments (BOP) crisis in the early 1990s, India
implemented a series of trade, industry, and investment reforms. These reforms
effectively liberalized the economy, ending a long period of relative isolation from
global markets and financial and technology flows. Since then the Indian
economy has become increasingly integrated with the world economy.6
Consequently, current account flows (receipts and payments of merchandise and
invisibles) as a proportion of GDP increased from 20% in FY1990–1991 to 53%
in FY2007–2008 (Figure 2). However, the most significant change can be
witnessed in the capital account. Due to the rationalization of procedures and
conditions for foreign investment, India has emerged as an attractive investment
destination. This is reflected as an increase in foreign portfolio investment inflows
from US$2 billion in FY2001–2002 to US$29 billion in FY2007–2008. Foreign
direct investment (FDI) inflows have also gone up significantly in recent years,
having risen to US$34.3 billion in FY2007–2008 from US$6.1 billion in FY2001–
2002. At the same time, Indian corporations have also entered the global market

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for mergers and acquisitions, resulting in some capital account outflow from
India. As a result, two-way flows of portfolio and direct foreign capital have gone
up from a mere 12% of GDP in FY1990–1991, to 64% of the GDP in FY2007–
2008, registering a fivefold increase. Interestingly, these ratios are significantly
higher than those in the US, for which trade in goods and services constituted
only 41% of GDP in 2007 and capital flows another 25% in the same year.

Transmission of the Crisis to the Indian

Economy

With India’s increased linkage with the world economy, India could not be
expected to remain immune to the global crisis or be decoupled from the global
economy. While it is true that the Indian banking sector remained largely
unaffected because of its very limited operations outside India or exposure to
sub-prime lending by foreign investment banks, the global crisis has affected
India through three distinct channels. These channels are financial markets,
trade flows, and exchange rates.
The financial sector includes the banking sector, equity markets (which are
directly affected by foreign institutional investment [FII] flows), external
commercial borrowings (ECBs) that drive corporate investments, FDI, and
remittances. The global crisis had a differentiated impact on these various sub-
sectors of the financial sector.
Given prudent regulations and a proactive regulator,7 the Indian banking sector
has remained more or less unaffected, at least directly, by the global crisis. The
imposition by the RBI of a higher provisioning requirement on commercial bank
lending to the real estate sector helped to curb the growth of a real estate price
bubble. This is one of the few global examples of a countercyclical capital
provisioning requirement by any central bank. In general, Indian banks were not
overly exposed to sub-prime lending. Only one of the larger private sector banks,
ICICI Bank, was partly exposed but it managed to thwart a crisis because of its
strong balance sheet and timely action by the government, which virtually
guaranteed its deposits. The banking sector as a whole has maintained a healthy
balance sheet. In fact, during the third quarter of FY2008, which was a nightmare
for many big financial institutions around the world, banks in India announced
encouraging results. Against an absolute decline in the profitability of non-
financial corporate enterprises, the banking sector witnessed a jump of 43% in its
profitability (Figure 3). A ban on complex structures like synthetic securitization
coupled with a close monitoring of appropriate lending norms by RBI also
ensured a better quality of banking assets. The non-performing assets as a ratio
to gross advances have remained well within prudential norms (Figure 4).

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Further, with an average capital risk weighted assets ratio (CRAR) of 13%, Indian
banks are well capitalized and better placed to weather the economic downturn.

Quarterly Profit Margin and Profit Growth of the Indian Banking Sector.

With the global financial system getting trapped in the quicksand, there is
uncertainty across the Indian Software industry. The U.S. banks have huge
running relations with Indian Software Companies. A rough estimate suggests
that at least a minimum of 30,000 Indian jobs could be impacted immediately in
the wake of happenings in the U.S. financial system. Approximately 61 per cent
of the Indian IT Sector revenues are from U.S financial corporations like
Goldman Sachs, Washington Mutual, Citigroup, Bank of America, Morgan
Stanley and Lehman Brothers. The top five Indian players account for 46 per
cent of the IT industry revenues. The revenue contribution from U.S clients is
approximately 58 per cent. About 30 per cent of the industry revenues are
estimated to be from financial services (Atreya 2008). The software companies
may face hard days ahead.
Exchange rate volatility in India has increased in the year 2008-09 compared to
previous years. Massive selling by Foreign Institutional Investors and conversion
of their holdings from rupees to dollars for repatriation has resulted in the rupee
depreciating sharply against the dollar. Between January 1 and October 16,
2008, the Reserve Bank of India (RBI) reference rate for the rupee fell by nearly
25 per cent, from Rs.39.20 per dollar to Rs.48.86 (Chandrasekhar and Gosh
2008). This depreciation may be good for India’s exports that are adversely
affected by the slowdown in global markets but it is not so good for those who
have accumulated foreign exchange payment commitments.
After the macro-economic reforms in 1991, the Indian economy has been
increasingly integrated with the global economy. The financial institutions in India
are exposed to the world financial market.

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Foreign institutional investment (FII) is largely open to India’s equity, debt
markets and market for mutual funds. The most immediate effect of the crisis has
been an outflow of foreign institutional investment from the equity market. There
is a serious concern about the likely impact on the economy because of the
heavy foreign exchange outflows in the wake of sustained selling by Foreign
Institutional Investors in the stock markets and withdrawal of funds by others.
The crisis resulted in net outflow of $ 10.1billion from the equity and debt markets
in India till 22nd Oct, 2008 (Kundu 2008). There is even the prospect of
emergence of deficit in the balance of payments in the near future.
The tumbling economy in the U.S is going to dampen the investment flow. It is
expected that the capital inflows into the country will dry up. Investments in mega
projects, which are under implementation and in the pipeline, are bound to buy
more time before injecting funds into infrastructure and other ventures. The
buoyancy in the economy is absent in all the sectors. Investment in tourism,
hospitality and healthcare has slowed down. Fresh investment flows into India is
in doubt.
One of the casualties of the crisis is the real estate. The crisis will hit the Indian
real estate sector hard (Sinha 2008). The realty sector is witnessing a sudden
slump in demand because of the global economic slowdown. The recession has
forced the real estate players to curtail their expansion plans. Many on-going real
estate projects are suffering due to lack of capital, both from buyers and bankers.
Some realtors have already defaulted on delivery dates and commitments. The
steel producers have decided to resort to production cuts following a decline in
demand for the commodity.
The financial turmoil affected the stock markets even in India. The combination of
a rapid sell off by financial institutions and the prospect of economic slowdown
have pulled down the stocks and commodities market. Foreign institutional
investors pulled out close to $ 11 billion from India, dragging the capital market
down with it (Lakshman 2008). Stock prices have fallen by 60 per cent. India’s
stock market index—Sensex— touched above 21,000 mark in the month of
January,2008 and has plunged below 10,000 during October 2008 ( Kundu
2008).The movement of Sensex shows a positive and significant relation with
Foreign Institutional Investment flows into the market. This also has an effect on
the Primary Market. In 2007-08, the net Foreign Institutional Investment inflows
into India amounted to $20.3 billion. As compared to this, they pulled out $11.1
billion during the first nine-and-a-half months of the calendar year 2008, of which
$8.3 billion occurred over the first six-and-a-half months of the financial year
2008-09 (April 1 to October 16).
The crisis will sharply contract the demand for exports adversely affecting the
country’s growth prospects. It will have an impact on merchandise exports and
service exports. The decline in export growth may sharply affect some segments
of the Indian Economy that are exportoriented. The slowdown in the world
economy has affected the garment industry. The orders for factories which are
dependent on exports, mainly to the U.S have come down following deferred
buying by big apparel brands. Rising unemployment and reduced spending by

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the Americans have forced some of the leading brands in the U.S to close down
their outlets, which in turn has affected the apparel industry here in India. The
U.S accounts for 55 per cent of all global apparel imports (Bageshree and
Srivatsa 2008). The global recession will undermine other major export sectors of
the Indian economy like sea foods, gems and jewellery.
One danger is of a dip in the employment market. The global financial crisis
could increase unemployment. Layoffs and wage cuts are certain to take place in
many companies where young employees are working in Business Process
Outsourcing and Information Technology sectors (Ratnayake 2008). With job
losses, the gap between the rich and the poor will be widened. It is estimated that
there would be downsizing in many other fields as companies cut costs. The
International Labor Organization predicted that millions of jobs will be lost by the
end of 2009 due to the crisis – mostly in “construction, real estate, financial
services, and the auto sector.” The Global Wage Report 2008-09 of International
Labour Organization warns that tensions are likely to intensify over the issue of
wages. There would also be a significant drop in new hiring (The Hindu 2008) All
these will change the complexion of the job market.
The ongoing crisis will have an adverse impact on some of the Indian banks.
Some of the Indian banks have invested in derivatives which might have
exposure to investment bankers in U.S.A. However, Indian banks in general,
have very little exposure to the asset markets of the developed world. Effectively
speaking, the Indian banks and financial institutions have not experienced the
kind of losses and write-downs that banks and financial institutions in the
Western world have faced (Venkitaramanan 2008). Indian banks have very few
branches abroad. Our Indian banks are slightly better protected from the financial
meltdown, largely because of the greater role of the nationalized banks even
today and other controls on domestic finance. Strict regulation and conservative
policies adopted by the Reserve Bank of India have ensured that banks in India
are relatively insulated from the travails of their western counterparts (Kundu
2008).
However, the indirect impacts of the crisis have affected Indian banks quite
badly. The liquidity squeeze in global markets following the collapse of Lehman
Brothers compelled Indian banks and corporations to shift their credit demand
from external sources to the domestic banking sector. This move exerted a lot of
pressure on liquidity in the domestic market and consequently short-term lending
rates shot up abnormally. The inter-bank call money rate spiked to 20% in
October 2008 and remained high for the next month (Figure 5). This credit
crunch, coupled with the loss of confidence that followed the Lehman Brothers
episode, increased the risk aversion of Indian banks and eventually hurt credit
expansion in the domestic market. Contrary to the trend, non-food credit
expansion started declining in November 2008 and became negative in January
2009 (Figure 6). The magnitude of the impact of the crisis can be understood
from the fact that non-food credit expansion during last five months of FY2008–
2009 has declined by more than 68% as compared with the same period in
previous financial year.

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After an impressive performance for nearly five years, foreign capital inflows lost
their momentum in the second half of 2008. The most significant change was
observed in the case of FIIs, which saw a strong reversal of flows. Against a net
inflow of US$20.3 billion in FY2007–2008, there was a net outflow of US$15
billion from Indian markets during FY2008–2009 as foreign portfolio investors
sought safety and mobilized resources to strengthen the balance sheet of their
parent companies. This massive outflow of FII created panic in the stock
markets. Consequently, equity markets lost more than 60% of their index value
and about US$1.3 trillion of market capitalization from an index peak of about
21,000 in January 2008 to 8,867 by 20 March 2009. This bad run at Dalal Street8
wiped out the primary market completely, which had been flourishing before the
onset of the crisis. Between FY2007–2008 and FY2008–2009, fund collection
through the primary market declined by 63%. In 2007, 106 initial public offerings
(IPO) were issued and raised a total amount of about US$11 billion. In contrast,
only 38 IPOs were issued in 2008 and resulted in accumulations of only US$3.8
billion.
Given the presence of unutilized liquidity in the global market, and India being
one of the few countries with positive growth, FIIs have once again started
flowing back to India (Figure 7). During the first two months of the current
financial year (April and May 2009), Indian equity markets received net FII
inflows of more than US$5 billion. Consequently, equity markets have partially
gained their lost value. However, owing to prevailing uncertainties, the primary
market has still not shown any sign of recovery. Most of the companies have put
their IPOs on hold and only one IPO has been issued so far in 2009.

Monthly Net Foreign Institutional Investment (FII) Inflows

The economic boom in India from FY2004–2005 to FY2007–2008 has also been
accompanied by a substantial increase in the inflows of FDI and external
commercial borrowings. The inflows of FDI increased from US$6 billion in
FY2004–2005 to US$34.3 billion in FY2007–2008 (Figure 10). The surge in FDI

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not only improved the domestic rate of capital formation but also helped many
industries improve in a technological capacity due to the technology inflows that
accompanied these FDI inflows. Like FDI, the inflows of ECBs also went up from
US$9 billion in FY2004–2005 to US$30.3 billion in FY2007–2008, registering a
threefold increase over four years. The spurt in ECBs benefited Indian
entrepreneurs in two different ways. First, it supported them in their overseas
mergers and acquisitions, making it easier for them to gain a market presence in
target countries. Secondly, the influx of ECBs allowed Indian firms to finance
their domestic capacity expansion at relatively lower capital costs.
Both FDI inflows and ECB volumes have been adversely affected by the turmoil
in the financial markets in advanced economies. Given the credit crunch in the
global markets since September 2008, Indian corporates managed to raise only
US$18 billion in FY2008–2009 as commercial credit from the overseas market,
which is 41% less than the amount raised in the previous year. The fall was
rather phenomenal during the second half of FY2008–2009 (Figure 11), when
ECB approvals9 declined from US$3 billion in September 2008 to less than
US$0.5 billion in February 2009. Likewise, though not to the same extent, FDI
inflows have also taken a hit. For the first time in last six years, FDI inflows
witnessed a negative growth of 2% in FY2008–2009.

Monthly External Commercial Borrowing, Approvals

Remittances are another source of inward foreign capital flows that in the past
have helped to balance India’s large trade account deficit and keep the current
account deficit at a reasonable level. The remittances from overseas Indians
started feeling the impact of the global crisis during the third quarter of FY2008–
2009 when, on a year-on-year basis, they declined by 0.5%. The impact
becomes more evident in the fourth quarter of FY2008–2009 when the inflow of
remittances declined by more then 29% as compared to the same period in

13
previous year (Figure 12). With the poor economic outlook for oil producing
economies in the Gulf and West Asia, coupled with rising pressure against
immigration in advanced countries, it is expected that remittances will further
decline in the coming quarters.
The sluggishness of the inflows of FDI, ECBs, and remittances combined with
the massive outflow of FII has resulted in the significant deterioration of India’s
capital account in FY2008–2009. From its peak in September 2007, the capital
account surplus as percent of GDP started to decline and disappeared
completely by December 2008 (Figure 13). This is the first time after a long
period that the capital account component of India’s BOP has been negative.
The second transmission of the global downturn to the Indian economy has been
through the steep decline in demand for India’s exports in its major markets.
Gems and jewelry was the first sector to feel pressure at the very beginning of
the global meltdown. In November 2008, it witnessed a sharp decline in export
orders from the US and Europe, which resulted in a retrenchment of more than
300,000 workers. Since then, the negative impact has expanded to other export-
oriented sectors such as garments and textiles, leather, handicrafts, marine
products, and auto components. Merchandise exports have registered a negative
average growth of 17% from October 2008 to May 2009. The decline in exports
has been accelerating, falling by 29.2% in May 2009 as compared to the same
month in 2008 (Figure 14). In all likelihood, it seems difficult for merchandise
exports to recover within this calendar year.
Like merchandise, exports of services are also facing a rather steep downturn.
During the third quarter of FY2008–2009, growth in service exports declined to a
mere 5.9% as compared to 34.0% in the corresponding period a year back. The
earnings from travel, transportation, insurances, and banking services have
contracted, while the growth rate of software exports has declined by more than
21 percentage points (Table 4). The real shock came in the fourth quarter of
FY2008–2009 when service exports witnessed a contraction of 6.6% as
compared to the same period in the previous year.
Though exports of both goods and services still account for only about 22% of
the Indian GDP, their multiplier effect for economic activity is quite large as the
import content is not high, unlike Chinese exports. This is reflected in the
manufacturing sector output experiencing a sharp slowdown in recent months,
during which exports have also shown a decline. The index of manufacturing
sector output (Manufacturing IIP), which had grown at 9.6% during FY2007–2008
and by 5.3% in the first half of FY2008–2009, slowed down to 0.5% in the third
quarter and further to -0.16% in the fourth quarter of FY2008–2009. Therefore,
the export slump is expected to have a significant impact on GDP growth in the
coming period.
The third transmission channel is the exchange rate. With the outflow of portfolio
investments and higher foreign exchange demand by Indian entrepreneurs who
are seeking to replace external commercial borrowing by domestic financing, the
Indian rupee has come under pressure. During last 12 months (from April 2008 to

14
March 2009) the Indian rupee has tumbled by 27% vis-à-vis the US dollar. At the
same time, foreign exchange reserves have also fallen by US$60 billion10
(Figure 15). However, with foreign exchange reserves remaining at 110% of total
external debt at the end of December 2008, investment sentiments should not be
unduly affected in the near term. The nearly 25% depreciation in the Indian
rupee’s exchange rate has partially nullified the benefits from the decline in
global oil and gas prices and has increased the cost of commercial borrowings.
The weaker Indian rupee should, however, encourage exporters and it is
possible that with imports declining as sharply as exports that the country’s trade
deficit may actually improve in the short run. Additionally, the external sector may
remain stable and not pose any major policy issue.
The timing of the external shock arising from the global economic downturn has
been rather unfortunate. The Indian economy was already in the middle of a
policy-induced slowdown and the crisis has further aggravated it. The impact of
the global crisis on the real economy became evident in the third quarter of
FY2008–2009, belying the optimistic official pronouncements and expectations of
some economists,11 when the Indian economy registered a modest growth rate
of 5.3%,12 significantly lower than 8.9% achieved in the corresponding period in
FY2007–2008, and after having achieved a 7.8% growth in GDP in the first half
of FY2008–2009. At the sectoral level, robust growth in community, social, and
personal services (22.5%) and financial, real estate, and business services
(8.3%) enabled the services sector to maintain healthy growth despite the sharp
decline in trade, hotel, transportation, and communication services. The
secondary sector in general and the manufacturing sector in particular performed
extremely badly. In the wake of a decline in domestic and export demand, the
manufacturing sector witnessed a moderate growth of 0.9%, while growth in
construction slowed down significantly from 9.7% to 4.2%.
However, estimates for economic growth in the final quarter of FY2008–2009
(from January to March 2009) have pegged the growth at 5.8% and the full year’s
GDP growth at 6.7%. These is sharply lower than the average GDP growth of
8.9% during the previous four years (from FY2004–2005 to FY2007–2008) and
also lower than 7.1%, which was the official estimate announced at the time of
the interim budget in February 2009. The key question is whether the 5.8%
growth in the fourth quarter of FY2008–2009 already reflects a turnaround in the
economy, which may be expected to achieve a higher GDP growth in FY2009–
2010.
In our view, this is far too optimistic. The economy will in all likelihood continue
on its downward trend in the first half of FY2009–2010 (from April to September
2009) before it recovers in the second half as the impacts of the global crisis on
the Indian economy potentially taper off by October 2009. For FY2009–2010 we
expect the GDP growth to be about 6.0%, still lower than 6.7% in FY2008–2009.
This estimate is based on a model of “leading economic indicators”13 that is
used to forecast the GDP growth.

15
POLICY RESPONSES
Fiscal Stimulus
It should be pointed out that the initial fiscal stimulus was actually provided in the
budget for FY2008–2009, announced in February 2008. Electoral considerations
made this into an expansionary exercise that included massive increases in
public outlays in support of employment guarantee schemes, farm loan waivers,
pay commission rewards, and increases in food and fertilizer subsidies. This
fiscal expansion is expressed by the revenue deficit increasing from 1.4% of the
GDP in FY2007–2008 to 4.3% in FY2008–2009. At the same time the fiscal
deficit of the central government increased from 2.7% in FY2007–2008 to 6.1%
in FY2008–2009. The expansionary public outlays included some measures that
implied a hefty transfer of purchasing power to farmers and to the rural sector in
general. These included farm loan waivers, funds allocated to the National Rural
Employment Guarantee Program (NREGP), Bharat Nirman (targeted for
improving rural infrastructure) Prime Minister’s Rural Road Program, and a large
increase in subsidies for fertilizers and electricity supplied to the farmers (Table
6). All of these measures were taken because of political considerations and not
in response to the global crisis. Nevertheless, they have helped to shore up rural
demand for both consumer durables and non-durables. In effect the higher than
expected GDP growth rate in both the third and fourth quarters of FY2008–2009
could be attributed to the budgetary splurge announced in February 2008. While
this has succeeded in shoring up GDP growth by raising rural demand, it did not
leave much fiscal space for the Government of India to respond in any significant
manner to counter the impacts of the global downturn.
However, some efforts were still mounted to counter the effects of the global
economic slow down. Three fiscal stimulus packages—one each in the months of
December, January, and March—were announced. These in aggregate
amounted to Rs crore 106,050 or US$21 billion,14 which is approximately 2% of
the GDP. This can be compared to the 4% of GDP that was provided as stimulus
in the FY2008–2009 budget discussed in the paragraph above. The three post-
December 2008 stimulus packages mainly are comprised by increased
government spending on infrastructure, reduction in indirect taxes, and some
assistance for export-oriented industries. In an attempt to boost the infrastructure
spending that has been acknowledged as the most effective tool to counter
economic downturn, the Government of India has increased its planned spending
by US$4 billion and has also allowed the state governments to borrow an
additional amount of US$6 billion from the market. Apart from this, the India
Infrastructure Finance Company Limited (IIFCL), a special purpose vehicle (SPV)
established in 2007, has been allowed to issue interest free bonds worth US$6
billion for refinancing the long-term loans for various infrastructure projects.

16
Secondly, to prop up domestic demand the central excise duty was gradually
slashed from 14% in December 2008 to 8% in March 2009 on all products except
petroleum products. Likewise the services tax rate has also been brought down
from 12% to 10%. The government has also provided some relief to export-
oriented industries through subsidizing interest costs of exporters by up to 2%,
subject to a minimum rate of 7% per annum. It has also allocated US$240 million
for a full refund of terminal excise duty or central sales tax, wherever applicable,
and another US$80 million for various export incentives schemes. The direct
fiscal burden of all the aforementioned measures adds up to about 2% of total
GDP. This looks rather small in comparison to the size of the stimulus in some
other economies like the PRC and the US. However, if we include the stimulus
provided in the FY2008–2009 budget, the Indian government has in effect
expanded its fiscal outlay by 6% of GDP during FY2008–2009. It can be argued
that the economy may have fared better if more fiscal space was available to
boost domestic demand to counter the collapse of external demand that started
in November 2008.

Monetary Policy Response

With the objective of maintaining price stability alongside a reasonable rate of
economic growth, the last two years have been very hectic for policymakers at
the RBI. After a comfortable period of low inflation, the Indian economy started
feeling the pressure of rising global commodity prices in the first quarter of
FY2004–2005. In response to this rise in inflation, the RBI started tightening
monetary policy in September 2004, raising the cash reserve ratios from 4.5% to
5.0%. As the inflationary situation worsened in the subsequent period, the
tightening of monetary policy became even more aggressive. Consequently,
inflation declined from around 8% in the middle of 2004 to less than 4% in
September 2007. Nevertheless, coinciding with the rising global inflation trends,
domestic inflation once again started increasing towards the end of 2007 and
became a major headline in the first week of June 2008 when it entered the
double-digit range for first time since the 1991 BOP crisis. It drew a sharp
reaction from the RBI and the speed of monetary tightening was further
increased. This credit tightening from FY2004–2005 onward ensured a soft
landing of Indian economy, which began overheating over the past three years
with the actual growth rate exceeding its potential growth rate. As a result the
growth rate began to slow down from the middle of FY2007–2008.
In the wake of global financial crisis and its potential adverse effects on the
Indian economy, monetary policy shifted gear and became expansionary from
October 2008. The rapid decline in Wholesale Price Index (WPI) inflation, which
has come down from its peak level of around 13% in August 2008 to less than
1% in April 2009, allowed the RBI to completely shift its focus from inflation to
growth. Since October 2008, the RBI has injected a considerable amount of
liquidity into the economy through a series of policy rate cuts. The cash reserve
ratios of banks has been brought down from 9% to 5%, while the repo rate15 has

17
been slashed by 425 basis points. Further, in order to discourage the banks from
parking overnight funds with the RBI, the reverse repo rate16 has been gradually
reduced from 6.0% in November 2008 to 3.25% in April 2009. The statutory
liquidity ratio (SLR) has been lowered by one percentage point. Apart from this,
some special refinancing schemes have also been announced to improve the
liquidity for certain sectors (Table 7). The cash reserve ratios reduction of 400
basis points since September 2008 alone has led to an injection of US$32.7
billion. In addition, another sum of US$12.9 billion has been injected through
unwinding the market stabilization scheme. As of April 2009, a cumulative
amount of nearly US$80 billion has been pumped in to the system (RBI 2009d).
As a result of the policy rate cuts, the prime lending rates of commercial banks
have come down from 13.75–14.0% in October 2008 to 12.0–12.5% January
2009. The call money rates have also remained stable at low levels and the
overnight money market rate has remained within the liquidity adjustment-facility
corridor.
Apart from the above-mentioned initiatives, the RBI has also liberalized the ECBs
and FII related norms. To attract the foreign portfolio investors, the FII limit on
corporate bonds has been increased from US$6 billion to US$15 billion. At the
same time, in an attempt to boost the construction sector, developers have been
permitted to raise ECBs for integrated townships projects, while NBFCs dealing
exclusively with infrastructure financing have also been allowed to access ECBs
from multilateral or bilateral financial institutions.
It could be argued that the three fiscal stimulus packages, in conjunction with the
transfer of purchasing power to the rural economy through increased budget
outlays on the rural sector and the hike in minimum support prices of various
crops, have saved aggregate demand and prevented GDP growth from
plummeting in to negative territory. This has also been helped by the quick
monetary policy response discussed above. In fact, in hindsight, our shock-
augmented leading indicator model that some experts at ICRIER have been
using to forecast GDP growth for India17 verifies this hypothesis. With the full
impact of the external shock, we were expecting a growth rate of 5.3% in the
fourth quarter of FY2008–2009. Nevertheless, with an actual growth rate of 5.8%,
our calculation suggests that the fiscal stimulus has neutralized nearly 20% of the
impact of the external shock. If we go with this line of argument, it seems that the
growth will pickup marginally in the coming quarters because the monetary policy
measures taken so far are expected to come in to play. Despite this, any hope for
a major revival of economic growth in FY2009–2010 looks unrealistic as the
positive impact of fiscal measures, such as the implementation of 6th Pay
Commission, is bound to taper off. According to our revised forecast, in a best-
case scenario GDP would grow by 6.0% in FY2009–2010 while in the worst-case
scenario it would only manage a growth rate of 5.0%. Other agencies like the
IMF, World Bank, and ADB have also estimated Indian GDP growth in FY2009–
2010 at similar levels in their latest forecasts released in March 2009. Thus, the
Indian economy will come down from the 9.0% level that it had achieved in the

18
last four years to 6.0–6.5%. The growth targets for the XI Plan18 will also have to
be lowered.

Actual and Forecasted Quarterly GDP Growth

ASSESSMENT OF THE POLICY

RESPONSES
The Indian fiscal policy response to the crisis can at best be summarized as
having been preempted by political considerations that resulted in a fiscal
expansion ahead of the global crisis and left only limited space to respond in the
aftermath of the crisis. Hence the fiscal response after December 2008 could be
argued to not have been as large as required.19 Given a high fiscal deficit
(central and state combined) of 5.4% in FY2007–2008, India had limited fiscal
maneuverability to begin with. However, due to electoral considerations a fiscal
stimulus of nearly 4% of GDP was induced in the FY2008–2009 budget. This
raised the combined fiscal deficit to about 10%, leaving barely any more for
further fiscal stimulus after the crisis.
The fiscal stimulus, though very small in size as compared to other countries,
worsened the fiscal deficit further, increasing it to 11.4% in FY2008–2009. The
increase in fiscal deficit had two implications. First, it drew a strong response
from international credit rating agencies and the sovereign credit rating of India
was in the danger of being lowered. Any further reduction in India’s credit rating

19
could have serious implications for capital inflows. Secondly, the high fiscal
deficit naturally led to an increase in government borrowings. Higher government
borrowing also put a lot of pressure on the interest rate, as reflected in the 10-
year bond yield rate going up along with the announcement of the new stimulus
packages. The long run interest rate increase could have serious implications for
private investment. The debt to GDP ratio was around 75% in FY2008–2009
(Figure 18). The rise in public debt to GDP ratio can be worrisome as it is now
well above levels reached in 1991 when the country faced a major crisis.
However, the present situation is not as serious primarily due to the strong
external sector balance that India has been successful in building up since the
beginning of this decade.
In sharp contrast to the fiscal policy response, the monetary authorities in India
acted aggressively once it was clear that inflationary pressures had subsided and
growth was beginning to slacken. Unfortunately, because of the government’s
large borrowing requirement and the stickiness in deposit rates that keep the cost
of funds high for the banks, the policy rate cuts have not filtered into the retail
credit market. The commercial bank’s lending rates, in real terms despite some
reduction, are still very high and banks are not able to push up credit off-take.
This is reflected in the continued decline in the growth of non-food credit off-take
from commercial banks in recent months. The positive impact of monetary policy
actions has therefore been somewhat limited.

POTENTIAL POLICY
MEASURES TO REIGNITE
GROWTH
There is not much room for further fiscal policy action as the consolidated fiscal
deficit of the central and state governments in FY2008–2009 is already
approximately 11% of the GDP. The budget for FY2009–2010, presented on 6
July 2009, estimates the fiscal deficit in FY2009–2010 to be at the same level.
This implies a significant increase in government borrowing, which has risen from
Rs 126,912 crore (US$25.3 billion) in FY2007–2008 to Rs 326,515 crore
(US$65.3 billion) in FY2008–2009 and is likely to be Rs 400,996 crore (US$80.1
billion) in FY2009–2010. This also implies a further rise in the debt to GDP ratio,
which is expected to go up to 77% and may induce credit rating agencies to
review their rating of Indian sovereign debt. Debt servicing, which accounted for
about 58% of total revenue receipts in FY2008–2009, is likely to rise even further
and pose a significant risk. This large volume of government borrowing is bound
to exert a significant upward pressure on market interest rates and also result in
inflationary pressures, especially if agriculture output is adversely affected by
deficient monsoons. Monetary policy will therefore face tough questions in the
coming months. On the one hand it will be trying to hold interest rates down to

20
stimulate private investment demand. On the other hand, it will have to keep a
very careful eye on any inflationary tendencies and act quickly to restrain them.
With very limited fiscal maneuverability and the monetary policy constrained by
the trade off between holding down interest rates and preventing inflationary
tendencies, the focus of policy measures must be to further raise India’s potential
output growth rate. Various agencies have set the target growth rate between
8.5–9.0%, as shown in the chart below. Raising the potential growth rate requires
another round of structural reforms that will improve the investment climate,
especially for small and medium enterprises (SMEs) that have suffered the most
with the collapse of external demand and employ the majority of the work force.
SMEs currently suffer from having to face a plethora of official procedures and
licensing and regulatory requirements that raise their transactions costs
significantly, making them uncompetitive in global markets and unable to
withstand import competition in domestic markets. The government will do well to
review all the policies that have an impact on “doing business” in India with the
clear objective of improving the investment climate. The evidence for this will be
best reflected in an improvement in India’s rankings in the World Bank surveys in
the coming year.
Other areas for policy attention that will help in removing some of the remaining
structural bottlenecks on raising the potential GDP growth rate are the removal of
entry barriers for corporate investment in education and vocational training,
improving the delivery of public goods and services, and expanding physical
infrastructure capacities, including a major effort at improving connectivity in the
rural regions. These measures will constitute the second generation of structural
reforms and will enable the Indian economy to climb out of the downward phase
of the growth cycle and then to extend the upward phase for a longer period than
was achieved in the last cycle. The two other areas that require attention and
have been often discussed are an urgent improvement in the physical
infrastructure and the delivery of public services, specifically urban utilities and
law and order. Attention on these reforms will be far more effective and have a
more permanent positive impact on raising India’s potential rate of growth, which
is essential if India is to achieve its goals of poverty reduction and rapid and
sustainable growth to improve the overall welfare level of its people.

21
POLICIES OF BANK OF
BARODA

PERFORMANCE HIGHLIGHTS
• Total Business (Deposit+Advances) increased to Rs 4,16,080 crore
reflecting a growth of 24.0%.
• Gross Profit and Net Profit were Rs 4,935 crore and Rs 3,058 crore
respectively. Net Profit registered a growth of 37.3% over previous year.
• Credit-Deposit Ratio stood at 84.55% as against 81.94% last year.
• Retail Credit posted a growth of 23.5% constituting 18.15% of the Bank’s
Gross Domestic Credit in FY10.
• Net Interest Margin (NIM) in global operations as per cent of interest
earning assets was at the level of 2.74% and in domestic operations at
3.12%.
• Net NPAs to Net Advances stood at 0.34% this year against 0.31% last
year.
• Capital Adequacy Ratio (CAR) as per Basel I stood at 12.84% and as per
Basel II at 14.36%.
• Net Worth improved to Rs 13,785.14 crore registering a rise of 20.6%.
• Book Value improved from Rs 313.82 to Rs 378.44 on year.
• Business per Employee moved up from Rs 911 lakh to Rs 1,068 lakh on
year.

KEY FINANCIAL RATIOS

Particulars 2009-10 2008-09

Return on Average Assets (ROAA) (%) 1.21 1.09
Average Interest Bearing Liabilities (Rs crore) 2,15,886.21 1,71,666.55
Average Cost of Funds (%) 4.98 5.81
Average Interest Earning Assets (Rs crore) 2,16,735.54 1,75,818.59
Average Yield(%) 7.70 8.58
Net Interest Margin (%) 2.74 2.91

22
Cost-Income Ratio (%) 43.57 45.38
Book Value per Share (Rs) 378.44 313.82
EPS (Rs) 83.96 61.14

SEGMENT-WISE PERFORMANCE
The Segment Results for the year 2009-10 (FY10) reveal that the contribution of
Treasury Operations was Rs 1,048 crore, that of Corporate/Wholesale Banking
was Rs 1,585 crore, that of Retail Banking was Rs 779 crore, and of Other
Banking Operations was Rs 2,732 crore. The Bank earned a Profit after Tax
(PAT) of Rs 3,058 crore after deducting Rs 1,906 crore of unallocated
expenditure and Rs 1,180 crore towards provision for tax.

MANAGEMENT DISCUSSION AND

ANALYSIS
Indian economy strongly rebounded during the year FY10 ahead of most
countries in the world, thanks to the timely monetary easing and strong fiscal
stimulus provided by the Reserve Bank of India (RBI) and the Central
Government, respectively, in the wake of the global crisis. Other factors that
facilitated its bounce-back during FY10 were an improving global economy, a
return of risk appetite in financial markets and large capital inflows.

Moreover, India was not at the centre of the crisis and its growth is largely
dependent on domestic drivers. So, the global crisis could not dent the country’s
medium-term growth potential.

The Government’s advance estimates for the year have put India’s real GDP
growth at 7.2% for FY10 reflecting a marked improvement over the 6.7%
recorded in FY09. The main contributors to this growth have been manufacturing
(8.9%), mining & quarrying (8.7%) and the services sector (8.8%). Agriculture
output, however, is estimated to have fallen by 0.2% as against a growth of 1.6%
in FY09 reflecting the poor South-West monsoon rains. According to the
Government reports, production of foodgrains and oilseeds is likely to have
declined by 8.0% and 5.0%, respectively, on year on year basis. However, the
adverse impact of sub-normal monsoon has been contained to a large extent by
a better-than-expected rabi (winter) crop in FY10.

Within the manufacturing sector, the industries like infrastructure, cement, steel,
automobiles, machinery & equipment, transport equipment, rubber, plastic &
chemical products, etc., have grown strongly during FY10. However, sectors like
consumer non-durables, power generation and labour intensive export-oriented

23
industries like textiles, gems & jewellery, etc., continued to remain fragile.

The expansion of services sector was healthier at 8.8% in FY10. However, it

slowed down from a year earlier due to a moderate pace of spending by the
Government on compensation to employees.

Final consumption expenditure too remained subdued during FY10, as growth in

both private and Government final consumption expenditure slowed down.
However, investment demand, especially gross fixed capital formation showed a
gradual recovery during the year.

The Wholesale Price Index (WPI) inflation, after remaining significantly subdued
during the first half of FY10, increased at a faster pace in the second half and
reached 9.9% by March, 2010. While a significant portion of inflation could be
explained by a shortfall in agricultural production and spikes in international
crude oil prices, indications of generalization of inflation became increasingly
evident starting from November 2009. Inflation in non-food manufactured
products increased from (-) 0.4% in November 2009 to 4.7% in March 2010.

A rebound in the economy and rising inflation pressures prompted the RBI to
signal the beginning of an exit from its crisis policy stance since October 2009
when it restored the Statutory Liquidity Ratio (SLR) to 25.0% and tightened
provisioning requirements for property loans. Subsequently, it raised the Cash
Reserve Ratio (CRR) by 75 bps to 5.75% in late January, 2010. Again, it raised
the Repo and Reverse Repo Rates by 25 bps each on March 19th 2010 ahead of
the Annual Monetary Policy in April, 2010 to guard against inflationary
expectations becoming entrenched. This was the first change in policy rates
since April 2009.

A strong revival in global demand brought back India’s export growth to a positive
zone in November 2009 after 13 months of year-on-year declines. Imports too
moved to positive growth in December 2009 after 12 months of year on year
contraction. In cumulative terms, however, exports declined by 11.3% (y-o-y) in
Apr-Feb, FY10, while imports declined by 13.5%. The trade deficit during the first
eleven months of FY10 stood at US$ 95.42 billion as against US$ 114.72 in the
corresponding period of FY09. The robust growth in invisible receipts observed
during the past few years was reversed in FY10 due to the lagged impact of
recession in advanced economies. Despite lower trade deficit, the fall in
invisibles surplus led to marginally higher current account deficit during FY10.
The latest available data show that the current account deficit during April-
December, 2009 stood at US$ 30.3 billion, higher than US$ 27.5 billion during
April-December, 2008.

A noteworthy feature of economic revival during FY10 was the resumption of

large capital inflows led by both the FII and FDI inflows. According to the RBI
Report, the FII (net) investment in India during FY10 was US$ 29 billion while

24
FDI inflows amounted to US$ 33.1 billion during April-February, FY10. In nominal
terms, the rupee appreciated against the US Dollar by 11.5% during FY10
primarily due to an upsurge in capital inflows. However, an increase in inflation
differentials between India and its trading partners during the year resulted in
much higher appreciation of real exchange rate.

During FY10, India’s foreign exchange reserves (FER) increased by US$ 27.1
billion to reach US$ 279.1 billion as at end-March 2010. Furthermore, the RBI
purchased 200 metric tonnes of gold from the IMF on November 3, 2009 as part
of the RBI’s FER management operations.

India’s external debt stock at US$ 251.4 billion at end-December 2009 recorded
an increase of US$ 26.8 billion over its level at March 2009 primarily on account
of an increase in long-term debt.

Indian equity markets displayed vibrancy and increased momentum during FY10
except for some occasional corrections caused by Dubai World default and the
Greek sovereign debt concerns during the last two quarters of FY10. On the
whole, the benchmark indices Sensex and the Nifty gained 81.0% and 74.0%
respectively, on year-on-year basis, primarily on the back of huge FII inflows.

The Central Government’s fiscal deficit for FY10 is expected to remain within the
6.8% of GDP target. Stronger divestment receipts and direct tax revenue could
make up for the shortfall, if any, in 3G auction proceeds and indirect tax
collections,while higher than budgeted spending on pensions and food & fertilizer
subsidies can be accommodated through savings on other accounts.

The Government’s record market borrowings programme proceeded well and in

a non-disruptive manner during FY10 with limited impact on bond yields.

The Union Budget for FY11 has set the goal of reducing the fiscal deficit to 5.5%
of GDP in FY11 and further to 4.8% in FY12 and to 4.1% in FY13. This will be
facilitated by the expected fall in expenditure items and likely revenue buoyancy,
going forward.

The Union Budget for FY11 began the exit from fiscal stimulus by partially rolling
back some of the duty relaxations introduced during the crisis period. It hiked the
excise duty from 8.0% to 10.0%. The other tax proposals included rationalization
of income tax slabs, additional excise duty on petrol & diesel, and a restoration of
5.0% customs duty on petroleum products, including crude oil. A landmark
reform in the area of government subsidy is the introduction of nutrient-based
subsidy for fertilizers. This policy is expected to improve agricultural productivity,
contain the subsidy bill over time and offer environmental benefits. Furthermore,
the government has decided not to issue any more special off-budget bonds from
FY11 to finance subsidies for fuel, food and fertlisers. Another major fiscal
development is a revival programme for the disinvestment of state-owned

25
enterprises listed on the stock exchanges. During FY10, the government raised a
record Rs 33,500 crore through this route, whereas the FY11 Budget calls for
realisation of Rs 40,000 crore through disinvestment.

The outlook for India, going forward, looks strongly positive. Its economy has
been showing steady improvement. Industrial recovery is expected to take firmer
hold on the back of rising domestic and external demand. Exports and imports
have bounced back since October-November, 2009. Flows of funds to the
commercial sector from both bank and non-bank sources have picked up.
Business outlook surveys by the RBI and other agencies suggest that business
optimism has improved. On balance, under the assumption of normal monsoon
and sustained good performance of the industrial and services sectors, the RBI
has projected real GDP growth for India for FY11 at 8.0% with an upside bias.
Indian banking industry stood firm and resilient amid the global crisis on the back
of its improved productivity since the mid-1990s and a robust regulatory and
supervisory framework. The Industry’s financial soundness indicators remained
strong with the Return on Average Assets (ROAA) at 1.13%, Capital Adequacy
Ratio (CAR) at 13.98% and Net NPA ratio at 1.05% as at end-March, 2009.

During the year FY10, the banking industry posted a decent business and
financial performance despite several challenges. For instance, the scheduled
commercial banks’ (SCB) Aggregate Deposits grew by 17.1% (y-o-y). Within this,
the term deposits grew by 16.2%, primarily due to a sharp decline in interest
rates offered on term deposits by several banks. As credit growth was quite
muted until November, 2009, the banks struggled to protect their net interest
margins by reducing the pressure on cost of deposits. A slower growth in term
deposits resulted in a slower growth of broad money supply or M3 by 16.8% (y-o-
y) during FY10. However, the banks’ demand deposits grew healthily by 22.8%
(y-o-y) during FY10 reflecting the industry’s aggressive efforts to mobilize low-
cost (CASA) deposits to reduce the pressure on cost of funds.

Amongst the sources of money supply, Net Bank Credit to the Government grew
at a strong pace till mid-November, 2009, as the Government financed majority
of its market borrowing requirements during this period. However, after
November, 2009 the growth in this component eased considerably. On year on
year basis, the Net Bank Credit to Government (including the RBI Credit)
increased by 30.6% during FY10.

The demand for non-food credit from the commercial sector started improving
from November, 2009 and eventually posted a growth of 16.9% (y-o-y) by end-
March 2010 as against the Reserve Bank of India’s (RBI’s) indicative target of
16.0%. In the year up to October 2009, deceleration in non-food credit had
continued and reached a low of 10.3%. With the industrial recovery getting
increasingly broad-based, demand for non-food credit revived since end-
November 2009 and pushed upwards the incremental credit-deposit ratio in the
second half of FY10. While, the state-owned banks played a major role in credit

26
expansion during FY10, credit extended by private banks also showed some
improvement in FY10 over last year. However, as per the RBI report, the loan
portfolio of foreign banks contracted further in FY10.

Reflecting the revival in credit demand from the private sector, the SCBs’
investment in SLR securities increased at a lower rate of 18.5% (y-o-y) as on
March 26, 2010 as against 20.0% a year ago. The SCBs’ holdings of SLR
securities was at 28.8% of their net demand and time liabilities at the end of
March, 2010.

Disaggregated data on sectoral deployment of gross bank credit in FY10 put out
by the RBI show an improvement in credit growth (y-o-y) to all major sectors like
agriculture, industry, services and retail loans from November 2009 onwards.

Within industrial sector, the sectors like infrastructure, basic metals and metal
products led the demand. Within services sector, credit growth for transport
operators, computer software, tourism, hotels, restaurants & trade accelerated in
February 2010. The credit to real estate decelerated sharply in FY10 mainly on
account of change in the concept of real estate introduced in September 2009.

Asset quality of Indian banks too remained largely stable during the year FY10
except for a few banks. The fears of rising delinquencies have faded now with
improving economic outlook and resumption of capital inflows.

For the year FY11, the outlook for Indian banking industry remains positive. With
improving economic prospects for India, many International Credit Rating
Agencies have revised their outlook for the Indian banking industry in the recent
past. For instance, the Moody’s Rating Agency has changed the fundamental
credit outlook for the Indian banking system from “negative” to “stable” on the
back of favourable trends in India’s economic indicators over the last few months.
Even the Fitch Rating Agency has stated in its latest report on Asian Banking
Industry that the operating environment for banks in Asia (including India) has
strengthened unexpectedly fast in June-December, 2009 shifting concerns away
from potential bad loans arising from severe economic slowdown to concerns
over asset price bubbles.
Managing various types of financial risks is an integral part of the banking
business. Bank of Baroda has a robust and integrated Risk Management system
to ensure that the risks assumed by it are within the defined risk appetites and
are adequately compensated. The Risk Management Architecture in the Bank
comprises Risk Management Structure, Risk Management Polices and Risk
Management Implementation and Monitoring Systems.
The overall responsibility of setting the Bank’s risk appetite and effective risk
management rests with the Board and apex level management of the Bank. Bank
has constituted a Sub Committee of the Board on ALM (Asset Liability
Management) and Risk Management to assist the Board on financial risk related
issues. The Bank has a full fledged Risk Management Department headed by a

27
General Manager and consisting of a team of qualified, trained and experienced
employees. The Bank has set up separate committees, of Top Executives of the
Bank to supervise respective risk management functions as under.

Asset Liability Management Committee (ALCO) is basically responsible for

the management of Market Risk and Balance Sheet Management. It has the
responsibility of managing deposit rates, lending rates, spreads, transfer pricing,
etc in line with the guidelines of Reserve Bank of India. It also plans out
strategies to meet asst-liability mismatches.

Credit Policy Committee (CPC) has the responsibility to formulate and

implement various enterprise-wide credit risk strategies including lending policies
and also to monitor Bank’s credit risk management functions on a regular basis.

Operational Risk Management Committee (ORMC) has the responsibility of

mitigation of operational risk by creation and maintenance of an explicit
operational risk management process.
The Bank has Board approved policies and procedures in place to measure,
manage and mitigate various risks that the Bank is exposed to. In order to
provide ready reference and guidance to the various functionaries of the Risk
Management System in the Bank, the Bank has in place Asset Liability
Management and Group Risk Policy, Domestic Loan Policy, Mid Office Policy,
Off Balance Sheet Exposure Policy (domestic), Business Continuity Planning
Policy, Pillar III Disclosure Policy, Stress Test Policy and Stress Test Framework,
Operational Risk Management Policy, Internal Capital Adequacy Assessment
Process (ICAAP), Credit Risk Mitigation and Collateral Management Policy duly
approved by the Board.
In the financial services industry, the main risk exposures that the Bank faces are
Liquidity Risk, Credit Risk, Market Risk and Operational Risk
Liquidity risk is the risk that the Bank either does not have the financial resources
available to meet all its obligations and commitments as they fall due or it has to
access these resources at excessive cost. During the year under review, the
financial system exhibited a fair level of liquidity with some adjustments done by
the monetary authority to balance credit growth and control inflation.

The Bank’s ALCO has the overall responsibility of monitoring liquidity risk of the
Bank. The liquidity risk is measured by flow approach on a daily basis through
Structural Liquidity Gap reports and on a dynamic basis by Dynamic Gap reports
on fortnightly basis for the next three months. Under Stock Approach, the Bank
has established a series of caps on activities such as daily call lending, daily call
borrowings, net short term borrowings and net credit to customer deposit ratio
and prime asset ratio, etc. The Asset Liability Management (ALM) Cell, working
in the Risk Management Department reviews the liquidity position on a daily
basis to ensure that the negative liquidity gap does not exceed the tolerance limit
in the respective time buckets. Specialized Integrated Treasury Branch, Mumbai

28
assesses the domestic liquidity in respect of all foreign currency exposures. In
respect of overseas operations, each territory assesses its currency wise liquidity
position at prescribed intervals. The funding requirements in case of
contingencies are also examined at regular intervals to prepare the Bank to meet
any exigencies of a shortfall in funds’ position. The Bank has managed its
liquidity by prudent diversification of the deposit base, control on the level of bulk
deposit, and ready access to wholesale funds under normal market conditions.
The Bank has significant level of marketable securities, which can be sold, used
for repo borrowings or as collaterals, if required.
Credit Risk is the risk that the counterparty to a financial transaction will fail to
discharge an obligation resulting in a financial loss to the Bank. Credit risk
management processes involve identification, measurement, monitoring and
control of credit exposures.

In order to provide clarity to the operating functionaries, the Bank has various
policies in place such as Domestic Loan Policy, Investment Policy, Off-Balance
Sheet Exposure Policy, etc, wherein the Bank has specified various prudential
caps for credit risk exposures. The Bank also conducts industry studies to assess
the risk prevalent in industries where the Bank has sizable exposure and also for
identification of sunrise industries. The industry reports are communicated to the
operating functionaries to consider the same while lending to these industries.

The Bank has adopted various credit rating models to measure the level of credit
risk in a specific loan transaction. The Bank uses a robust rating model
developed to measure credit risk for majority of the business loans (non personal
loans). The rating model has the capacity to estimate probability of default (PD),
Loss Given Default (LGD) and unexpected losses in a specific loan asset.

Apart from estimating PD and LGD, the credit rating model will also help the
Bank in several other ways as under.
• To migrate to Rating Based Approaches of computation of Risk Weighted
Assets
• To price a specific credit facility considering the inherent credit risk.
• To measure and assess the overall credit risk and to evolve a desired
profile of credit risk.
Apart from assessing credit risk at the counterparty level, the Bank has
appropriate processes and systems to assess credit risk at portfolio level. The
Bank undertakes portfolio reviews at regular intervals to improve the quality of
the portfolio or to mitigate the adverse impact of concentration of exposures to
certain borrowers, sectors or industries.
Market risk implies possibility of loss arising out of adverse price movements of
financial instruments like bonds, equity, forex contracts, etc. The objective of
market risk management is to avoid excessive exposure of the Bank’s earnings
and equity to such losses and to reduce the Bank’s exposure to the volatility

29
inherent in financial instruments such as securities, foreign exchange contracts,
equity and derivative instruments, as well as balance sheet or structural
positions. The primary risk that arises for the Bank as a financial intermediary is
interest rate risk due to the Bank’s asset-liability management activities. Other
market related risks to which the Bank is exposed are foreign exchange risk on
foreign currency positions, liquidity, or funding risk, and price risk on trading
portfolios.

The Bank has clearly articulated policies to control and monitor its treasury
functions. The Bank also has an asset liability management policy to address the
market risk. These policies comprise management practices, procedures,
prudential risk limits, review mechanisms and reporting systems. These policies
are revised periodically in line with changes in financial and market conditions.

The Interest rate risk is measured through interest rate sensitivity gap reports
and Earning at Risk. Furthermore, the Bank calculates duration, modified
duration, Value at Risk for its investment portfolio consisting of fixed income
securities, equities and forex positions on monthly basis. The Bank monitors the
short-term Interest rate risk by NII (Net Interest Income) perspective and long-
term interest rate risk by EVE (Economic Value of Equity) perspective. The Value
at Risk for the treasury positions is calculated for 10 days holding period at 99%
confidence level. The stress testing of fixed interest investment portfolio through
sensitivity analysis and equities through scenario analysis is regularly conducted.
Based on the RBI directions, the Bank is also estimating the Economic Value of
Equity impact on a quarterly basis.
Operational risk is the risk of loss on account of inadequate or failed internal
process, people and systems or external factors. As stated above, the
Operational Risk Management Committee (ORMC) has the responsibility of
monitoring the operational risk of the Bank. The Bank monitors operational risk
by reviewing whether its internal systems and procedures are duly complied with.
The Bank collects and analyses loss and near miss data on operational risk
based on different parameters on a half yearly basis and, wherever necessary,
corrective steps are taken.
The Bank has a very large overseas presence amongst the Indian banks and has
implemented the Basel-II Guidelines from 31st March 2008. In keeping with the
guidelines of the Reserve Bank of India, the Bank has adopted Standardized
Approach for Credit Risk, Basic Indicator Approach for Operational Risk, and
Standardized Duration Approach for Market Risk for computing the capital
adequacy ratio. The Bank has, therefore, been computing the Capital to Risk
Weighted Assets Ratio (CRAR) on parallel basis under Basel-I and Basel-II
Guidelines. The Bank is also providing additional capital towards Operational
Risk under Basel II guidelines. The CRAR of the Bank is summarized as under.
As on Basel I Basel II
31.03.2008 12.91% 12.94%
31.03.2009 12.88% 14.05%

30
31.03.2010 12.84% 14.36%

In compliance with the Pillar–II guidelines of the Reserve Bank of India under
Basel II framework, the Bank formulated its Policy of Internal Capital Adequacy
Assessment Process (ICAAP) to assess internal capital in relation to various
risks the Bank is exposed to. Stress Testing and scenario analysis are used to
assess the financial and management capability of the Bank to continue to
operate effectively under exceptional but plausible conditions. Such conditions
may arise from economic, legal, political, environmental and social factors

The Bank has a Board approved Stress Testing Policy describing various
techniques used to gauge their potential vulnerability and the Bank’s capacity to
sustain such vulnerability. The Bank conducted its ICAAP tests on semi annual
frequency along with stress tests as per the ICAAP Policy of the Bank.

Key Financial Indicators - Profitability Ratios

Particulars (In
S.No. 31.03.2006 31.03.2007 31.03.2008 31.03.2009 31.03.2010
Percentage)
Interest Income /
1 Average Working 6.59% 7.22% 7.63% 7.78% 6.86%
Funds (AWF)
Interest expenses /
2 3.65% 4.35% 5.10% 5.14% 4.42%
AWF
Net Interest Margin
3 3.20% 3.05% 2.90% 2.91% 2.74%
(NIM)
Interest spread /
4 2.93% 2.87% 2.53% 2.64% 2.44%
AWF
Non-Interest
5 1.12% 1.11% 1.32% 1.42% 1.15%
Income / AWF
Operating expenses /
6 2.25% 2.04% 1.96% 1.84% 1.56%
AWF
7 Cost Income Ratio 55.43% 51.30% 50.89% 45.38% 43.57%
Gross (Operating)
8 1.81% 1.94% 1.89% 2.22% 2.03%
profit / AWF
9 Net profit / AWF 0.78% 0.82% 0.93% 1.15% 1.26%
10 Return on Net Worth 10.85% 12.17% 15.07% 19.48% 22.19%
11 Return on Assets 0.73% 0.72% 0.80% 0.98% 1.10%
Return on Average
12 0.79% 0.80% 0.89% 1.10% 1.21%
Assets
13 Yield on Advances 7.43% 8.37% 9.53% 9.50% 8.55%
14 Cost of Deposits 4.15% 4.77% 5.69% 5.71% 4.90%
Dividend payout
Ratio (including
15 25.11% 24.59% 23.75% 17.22% 20.90%
Corporate Dividend
Tax)
Credit -- Deposit
16 67.15% 74.35% 77.32% 81.94% 84.55%
Ratio

31
 Credit + Non SLR
Investment
(excluding
17 74.94% 80.21% 82.78% 87.44% 88.83%
Investments in
Subsidiaries) --
Deposit Ratio
Capital Adequacy
18 13.65% 11.80% 12.91% 12.88% 12.84%
Ratio (BASEL I)
Tier - I 10.98% 8.74% 7.63% 7.79% 8.22%
Tier - II 2.67% 3.06% 5.28% 5.09% 4.62%
Capital Adequacy
19 - - 12.94% 14.05% 14.36%
Ratio (BASEL II)
Tier - I - - 7.64% 8.49% 9.20%
Tier - II - - 5.30% 5.56% 5.16%

Key Financial Indicators - Efficiency Ratios

Particulars (In
S.No.. 31.03.2006 31.03.2007 31.03.2008 31.03.2009 31.03.2010
Percentage)
1 Employees (number) 38774 38086 36774 36838 38960
2 Branches (number) 2743 2772 2899 2974 3148
Business per
3 employee (Rs. in 3.96 5.48 7.04 9.11 10.68
crore)
Average Business
4 per employee (Rs in 3.51 4.64 5.94 7.57 8.94
crore)
Gross Profit per
5 employee (Rs. in 4.95 6.34 7.96 11.69 12.67
lakhs)
Net Profit per
6 employee (Rs. in 2.13 2.70 3.90 6.05 7.85
lakhs)
Business per branch
7 55.99 75.23 89.25 112.86 132.17
(Rs. in crore)
Gross Profit per
8 0.70 0.87 1.01 1.45 1.57
branch (Rs. in crore)
Net Profit per branch
9 0.30 0.37 0.50 0.75 0.97
(Rs. in crore)
Earnings per share
10 27.10 28.18 39.40 61.14 83.96
(Rupees)
Book Value per
11 209.18 231.59 261.54 313.82 378.44
share (Rupees)

Economic and Banking Environment

Indian economy and its banking industry passed through many ups and downs
throughout the year 2009-10. The first half of the year was marked by a sharp
contraction in agricultural output caused by deficient monsoon, a continued

32
slowdown in final consumption expenditure, a negative growth in exports/imports
and a muted demand for bank credit.
However, in the second half of 2009-10, the economy witnessed a quick rebound
thanks to the timely countercyclical policies of the Government and the Reserve
Bank of India (RBI) in response to the global crisis, a pick up in several
economies of the world and a recovery in capital inflows.
Indian industry saw a substantial turnaround in the latter half of 2009-10. As a
result, the industrial production for 2009-10 registered a growth of 10.4% as
against 2.8% in 2008-09. The major growth drivers of industrial production were
mining and manufacturing sectors and within the manufacturing sector, the
capital goods and consumer durables sectors. Both exports and imports too
turned positive by November-December, 2009 after contracting continuously for
the previous 12 to 13 months.
However, inflation emerged as the major macro risk during 2009-10. While infl
ationary pressures since late 2009 stemmed initially from rising food prices, non-
food inflation too picked up in the last quarter of 2009-10 with overall demand
getting stronger and a rise in the administered prices of domestic fuels. The
monthly headline inflation for March, 2010 sharply rose to 11.04% - the highest
since October, 2008.
Accelerated growth in both inflation and industrial production prompted the RBI to
normalize its Monetary Policy and move its focus to “recovery management” from
“crisis management”. During the last quarter of 2009-10, the RBI raised Cash
Reserve Ratio by 75 bps and Repo/ Reverse Repo rates by 25 bps each to
anchor inflation expectations.
India’s merchandise trade managed to recover in the latter part of the year from
the severe impact of global financial turmoil. However, taking the entire year
2009-10, Indian exports contracted by (-) 4.7% as against a growth of 3.4% in
2008-09.
Capital flows continued to remain buoyant throughout the year 2009-10. During
the year, total foreign investments amounted to US $ 66.5 billion as against US $
21.3 billion in 2008-09. India’s foreign exchange reserves (FER) increased by US
$ 27.1 billion during 2009-10 to reach US $ 279.1 billion at the end of March
2010. This was mainly attributed to higher capital inflows in the form of portfolio
investments during the year 2009-10.
Mirroring the real sector progress in the second half of 2009-10, the Indian
banking industry too posted a decent performance during 2009-10. The
Scheduled Commercial Banks’ Aggregate Deposits expanded by 17.1% (y-o-y)
and Non-food Credit by 16.9% (y-o-y) during 2009-10. It may be noted that the
PSU banks played a major role in financing productive investments during 2009-
10.
However, the banking industry as a whole had witnessed a considerable
deceleration in credit demand till October, 2009. While the asset quality remained
relatively stable, credit costs increased for several banks with the maturing of

33
restructured loans. Furthermore, a rise in fiscal deficit on account of deceleration
in tax revenue growth gave rise to higher market borrowings during 2009-10.
This resulted in heightened volatility in bond yields and posed tough challenges
to the banking industry’s treasury operations.
Let me now give you a detailed account of your Bank’s business and financial
performance during 2009-10 against the economic backdrop just presented.

Overview of Bank’s Performance in 2009-10

It was another successful year for Bank of Baroda as once again it delivered
impressive results, highlighting the sustainability of its performance despite
ongoing economic uncertainty. Also, during this year, the Bank took forward its
objective of “growth with quality” by creating a solid strategic base.
Moreover, your Bank achieved all the targets under the Statement of Intent that it
had committed to the Government of India (on business, profitability and asset
quality fronts) for the year 2009-10 at the beginning of the year.
Let us now discuss the main highlights of your Bank’s performance during the
year under review.

Global Business
The Global Business of your Bank reached Rs 4,16,080 crore by end- March,
2010 with an annual growth of 24.0%. While Global Deposits registered a growth
of 25.3% (y-o-y), Global (Net) Advances expanded by 22.2%. In domestic
operations, your Bank’s Deposits grew by 22.4% (y-o-y), whereas Advances
(net) expanded by 21.3%. Your Bank consciously maintained its business growth
well above the banking industry’s average to further improve its market share.
Your Bank’s low cost deposits (CASA) grew at the healthy pace of 25.5% (y-o-y)
in global operations during 2009-10. Within India also, the growth of CASA
deposits was 25.1%, which helped improve the domestic CASA share to 35.63%
from the previous year’s 34.87%.
You are aware that your Bank enjoys considerable advantage from its extensive
overseas operations in 25 countries through 78 offices. Cashing in on the early
signs of global recovery and surging trade volumes, your Bank’s Overseas Credit
expanded at the pace of 25.1%, whereas Overseas Deposits grew by 36.1% on
year on year basis during 2009-10. Your Bank’s Overseas Business contributed
almost 24.0% to its Global Business during the year under review

Segment-wise Business
Your Bank maintained its thrust on wellbalanced growth across all business
segments during 2009-10. Within India, its credit to Priority Sector grew by 23.7%
(y-o-y) to Rs 48,552 crore in 2009-10 and formed 44.43% of the Adjusted Net

34
Bank Credit. Within this segment, Agricultural Advances of your Bank recorded a
growth of 27.4% to reach Rs 21,617 crore by end-March, 2010. Your Bank’s
Credit to Weaker Sections too grew by a robust 34.2% and touched Rs 10,945
crore by end-March, 2010.
Your Bank’s Retail Credit posted a growth of 23.5% (y-o-y) in 2009-10 and
attained the level of Rs 24,248 crore by end-March, 2010. Similarly, its Home
Loan book expanded by 24.8% and reached the level of Rs 10,313 crore by year
end. Your Bank’s credit to Micro, Small & Medium Enterprises (MSME) showed a
robust growth of 44.0% and touched Rs 21,111 crore by the end of 2009-10.

Net Interest Income

Your Bank’s Net Interest Income grew by 15.9% (y-o-y) to reach Rs 5,939 crore
in 2009-10 supported by a sequentialimprovement in the Bank’s Net Interest
Margin (NIM) on the back of relatively higher share of CASA deposits, reduced
dependence on high cost bulk deposits and timely downward revisions in deposit
rates. While your Bank’s Global NIM stood at 2.74%, its Domestic NIM stood at
3.12% during 2009-10.

Profitability
Your Bank’s Net Profit witnessed a respectable growth of 37.3% (y-o-y) in 2009-
10 to touch Rs 3,058 crore by end- March, 2010 on the back of healthy business
growth, prudent control over cost of funds, better operational effi ciency and
lower provisions on account of stable asset quality.

Asset Quality
Your Bank continued to maintain its good performance in asset quality
management during 2009-10 also. While the Indian banking industry witnessed
remarkable increase in nonperforming assets during 2009-10, your Bank could
restrict its Gross NPA to 1.36% and Net NPA to 0.34% thanks to its robust
systems of credit origination and monitoring. The Bank’s Incremental
Delinquency Ratio was contained at 1.13% in 2009-10. Your Bank’s rigorous
follow up of all NPA accounts has yielded it Cash Recovery of Rs 383 crore,
besides upgrading of accounts of over Rs 194 crore into standard advances.
Moreover, your Bank could recover Rs 300 crore from the prudentially written off
accounts during the year under review. Your Bank’s NPA Coverage Ratio stood
at the healthy level of 74.90% in 2009-10 as against the regulatory requirement
of 70.00%.

Cost-Income Ratio

35
Your Bank’s Cost-Income Ratio declined from 45.38% in 2008-09 to 43.57% in
2009-10 reflecting a significant improvement in operating efficiency during the
year under review.

Capital Adequacy
Your Bank’s Capital Adequacy Ratio stood at the comfortable level of 14.36%
under Basel II as on 31st March, 2010 with Tier I Capital at 9.20%. During the
year under review, the Bank strengthened its Capital Base by raising Rs 1,000
crore through unsecured subordinated bonds and Rs 900 crore through
innovative perpetual bonds.

Net Worth
Your Bank’s Net Worth significantly improved to Rs 13,785.14 crore in 2009- 10
registering a year on year growth of 20.6%.

Return on Average Assets

Your Bank’s Return on Average Assets improved from 1.09% in 2008-09 to
1.21% in 2009-10 on sustainable improvement in core earnings and operating
effi ciency.

Return on Equity
Your Bank’s Return on Equity improved from 19.48% in 2008-09 to 22.19% in
2009-10 on sustained improvement in profi tability and productivity.

Book Value per Share

Your Bank’s Book Value per Share too improved signifi cantly from Rs 313.82 in
2008-09 to Rs 378.44 in 2009-10 reflecting a decent growth of 20.6% (y-o-y).

Earning Per Share

Your Bank’s Earnings per Share also improved signifi cantly from Rs 61.14 in
2008-09 to Rs 83.96 in 2009-10 reflecting a strong growth of 37.3% (y-o-y).

Business per Employee

Your Bank’s Business per Employee grew by a robust 17.2% (y-o-y) from Rs 911
lakh in 2008-09 to Rs 1,068 lakh in 2009- 10, as your Bank could leverage
effectively its newly created technology and marketing platforms.

36
Bank’s Key Strategic Initiatives
The Human Resource (HR) strategies have been a key component of your
Bank’s overall strategic effort towards business transformation. The prime
objective of the HR function is to harness the employee potential for serving the
customers better. Your Bank is endowed with a competent and highly motivated
employee base of around 38,071, who are engaged in handling the extensive
business operations of the Bank across the globe. During 2009-10, your Bank
undertook a major initiative towards Business Process Reengineering to improve
the sales and marketing orientation of its employees. The salient features of this
project are as follows.

Business Process Re-engineering

Your Bank embarked upon a massive Business Process Re-engineering and
Organization Restructuring initiative and launched Project Navnirmaan in the
month of June, 2009. This project aims to harness the power of technology and
align its processes to bring about enterprisewide sales orientation and process
simplification.
Through redesigned work streams and centralization of non-customer facing
activities, by fi ne-tuning of its various business units and by focusing on ensuring
effi cient working of its branches, your Bank is hoping to tone up its service
delivery system to achieve enhanced business and profi tability.
The Baroda Next Branch Model under this Project, to be rolled out in all the
Metro and Urban branches of your Bank is intended to provide superior customer
experience through improved layout and ambience, besides simplifi ed/
redesigned processes aided by self-service, front-end automation, and shifting of
many transaction handling processes to different back offices to ensure efficient
turnaround time.
There are several projects at various stages of implementation under
Navnirmaan. Broadly, these are: (1) Ideal future branch model with sales focus,
(2) Effective usage of alternate delivery channels, (3) World-class “Lean Service
Factory”, (4) Call centre, (5) Centralised MIS & Business Intelligence Unit, (6)
Restructuring of organisation, (7) Credit flow redesign, (8) Capability building
within the organisation for ensuring sustainability of the change efforts through
the Academy of Excellence.

New Technology Platform

Your Bank achieved 100.0% Core Banking Solutions (CBS) for all its domestic
branches during September, 2009. All the CBS branches of your Bank are
enabled for inter-bank remittances through RTGS and NEFT. The CBS has also
been implemented in your Bank’s 46 overseas branches. Your Bank’s ATM
network expanded to 1,315 during 2009-10. Your Bank launched several new IT
products and services such as Online Trading Project, ATM Switch application,

37
Phone Banking, 3D Secure Implementation under the Internet Payment Gateway
Project, and Payment Messaging Solution, etc, during the year under review.

Initiatives in Retail Business

Your Bank opened 178 new domestic branches and merged four branches
during 2009-10. The Bank’s Retail Business continued to be one of the thrust
areas for achieving business growth during 2009-10. In order to achieve the
sustained business growth, your Bank improved and customized several retail
lending products and launched a number of business mobilisation campaigns
spread over the year. Going by the past success, your Bank opened six new
Retail Loan Factories during 2009-10. Furthermore, it introduced online modules
for Home Loan and Education Loan Applications. At the instance of Ministry of
Finance, Government of India, your Bank launched a new subsidy linked housing
loan scheme styled as “Interest Subsidy Scheme for Housing the Urban Poor” on
October 10, 2009.

Initiatives in Priority Sector & Farm Loan Business

Your Bank has always been a frontrunner in the area of Priority Sector and
Agriculture lending, harnessing the vast potential of the rural market through its
wide network of 1,126 rural branches and 721 semiurban branches. Your Bank
has identifi ed 450 Thrust Branches across India to enhance Agriculture lending
which constituted 34.0% of total Agriculture lending as at end-March 2010.
Towards effective use of technology in rural agricultural lending, your Bank
introduced IT-enabled smart card based technology for fi nancial inclusion. Also,
around nine Baroda Swarojgar Vikas Sansthan (BSVS) / Baroda R-SETI Centres
were opened during 2009-10.
Your Bank also implemented the Business Facilitators Model across the country
to accelerate Financial Inclusion of the excluded segment as well as to augment
its agriculture portfolio. These Business Facilitators mainly canvass loan
applications for the Bank. Your Bank achieved 100.0% Financial Inclusion in 21
out of 44 of its lead districts. Over two million no-frill savings accounts have been
opened in your Bank so far. Furthermore, your Bank opened four Financial
Literacy and Credit Counselling Centres christened as “SAARTHEE” at Ajmer,
Raebareli, Amethi and Baroda. These centres would be providing fi nancial
literacy and credit counselling to needy persons.

Initiatives in MSME Business

The Micro, Small and Medium Enterprises (MSME) segment has been a vital
component of the Indian economy. To promote the growth of this sector, your
Bank took several measures during the year under review. It set up three new
SME Loan factories during 2009-10. Dedicated SME Meets and Interactive
Sessions were held at several centres with SME customers. Your Bank
introduced seven new customercentric area specifi c products to suit the local
cluster needs. Your Bank celebrated a special SME Month from 1st December,

38
2009 to 31st December, 2009, which was subsequently extended up to 15th
January, 2010 in order to give boost to SME business. Certain concessions in
the rate of interest and service charges were announced for loans sanctioned
during the celebration period.

Initiatives to Diversify Income Streams

During the year under review, the Bank diversifi ed into life insurance business
by forming a three-way Joint Venture amongst
Bank of Baroda, Andhra Bank and Legal & General Group Plc (UK). The
company named as IndiaFirst Life Insurance Company
Ltd. received an overwhelming responsefrom the Bank’s esteemed customers
across the country making the company the fastest ever Insurance company to
reach Rs 100 crore premium collections in the fi rst 100 days.

Initiatives in Overseas Business

Given the current state of many developed countries, your Bank’s Overseas
Management primarily focused on strengthening the risk management and AML
systems. To improve the overseas penetration, your Bank launched aggressive
marketing campaigns, expanded customer base and took various steps in the
interest of long-term growth of overseas business. Your Bank also continued with
its branch expansion plans to take advantage of the business opportunities
available in various countries around the world. During 2009-10, four new
branches of the Bank’s subsidiaries were opened at San Fernando (Trinidad &
Tobago), Chaguanas (Trinidad & Tobago), Mukono (Uganda) and Lira (Uganda).
Moreover, the Reserve Bank of New
Zealand registered your Bank’s subsidiary, Bank of Baroda (New Zealand) Ltd.,
as a Bank from 1st September, 2009. Your Bank also implemented CBS at all
the overseas centres except New York and Brussels in order to take
maximumadvantage of the ‘State of the Art Technology’ and provide quality
products and Services to customers at a competitive price. Besides, your Bank
launched various new products and services and enhanced the features of
existing schemes to synchronise with the governmentspecifi c schemes.

Corporate Social Responsibility (CSR) Initiatives

Keeping in view the commitment of your Bank to address various social causes
as a necessary aspect of its Corporate Governance, the Bank, through its
untiring efforts, empowered the community towards the socio-economic
development of the underprivileged and weaker sections. As stated earlier, your
Bank has so far established 25 Baroda Swarozgar Vikas Sansthan (Baroda R-
SETI) for imparting training to the unemployed youth, free of cost for gainful self
employment and entrepreneurship skill development which would help them
improve their family economic status and also give a boost to the local economy
in those locations. These Santhans so far have trained more than 37,000 youth
out of which around 22,000 were gainfully self employed.

39
Most of your Bank’s social activities are linked to rural masses. Your Bank has so
far established 52 Baroda Gramin Paramarsh Kendra for knowledge sharing,
problem solving and credit counseling for rural masses across the country. In
order to spread awareness among the rural mass on various fi nancial and
banking services and to speed up the process of financial inclusion, your Bank
has established four Financial literacy and Credit counseling Centres at Ajmer,
Amethi, Baroda and Raebareli.
Your Bank has adopted 101 villages across India for their all-around
development and to provide financial assistance for development of infrastructure
facilities like setting up village libraries, community hall and solar lighting systems
in villages. Earlier, your Bank had adopted Dungarpur District in Rajasthan for
total integrated rural development and 100.0% financial inclusion, which has
already been achieved. Furthermore, under this project, your Bank has provided
scholarships to 50 tribal girls to promote education among tribal community.

The Road Ahead

While the Indian economy may pull back slightly after the strong showing in
therecent months, the receding effects of global crisis on the U.S. economy --
India’s major trade partner and prospects for strong domestic private investment
and consumption suggest that India’s real GDP is set to grow at 8.0% with an
upside bias during 2010-11, up from 7.4% in 2009- 10. In that case, the RBI’s
guidance for the Indian banking industry’s deposit and non-food credit growth at
18.0% and 20.0%, respectively, appears to be achievable. Growth may slightly
ease in the year 2011-12, as monetary and fi scal stimulus is further withdrawn to
check galloping pace of headline infl ation, which is currently in double digits.
However, the current policy mix should prove conducive to achieving strong
growth with relatively lower infl ation over the medium term. The RBI intends to
further raise policy rates along with possibly reserve requirements. This means
long-term interest rates are likely to resume a rising trend with a return to more
normal economic and financial conditions.
India’s strong domestic growth drivers, relatively higher dependence on domestic
sources of fi nancing and lower dependence on external official creditors
wouldinsulate it from unpredictable changes in global investor and creditor confi
dence in 2010-11.
Against this guidance, I would now like to share with you, your Bank’s business
objectives for the year 2010-11. As in the past couple of years, your Bank would
continue to perform with thrust on sustainable growth. We will try to achieve this
by – (a) maintaining healthy CASA growth, (b) achieving balanced growth across
all business segments such as wholesale, retail, MSME, agriculture and
overseas operations, (c) keeping a strong back up of fee-based income and, (d)
implementing stringent management of asset quality.
Your Bank will continue to leverage its Technology, Brand value and Human
Resource strengths to serve its customers in the best possible way. Hence, its
Motto for the financial year 2010-11 is “Leveraging Technology for Augmenting

40
Business Growth and Profitability”. The project “Navnirmaan” launched in 2009-
10 should help your Bank in optimizing the available physical and human
resources for maximizing business and profit.
Your Bank will continue to remain committed to create as much sustainable value
for its stakeholders as possible. It is well prepared and poised to make use of
growing economic opportunities to add to its strength. During the last couple of
years, which were marked with rising economic challenges and uncertainties,
your Bank has aligned itself well with the new normal environment. It has also
built strong strategic foundations to sustain its performance in the years ahead.
The first quarter of 2010-11 has demonstrated that your Bank is well positioned
and on the right course to achieve its set business objectives for 2010-11.

Economic Review
Indian economic environment was fairly mixed and uncertain during 2009-10
(FY10). The first half of the year (i.e., H1, FY10) was overcast by the monsoon
failure and a sharp decline in foodgrain production, a continued slowdown in final
consumption expenditure, a muted demand for bank credit and a negative growth
in both exports and imports.
However in the second half of 2009-10 (i.e., H2, FY10), countercyclical policies,
a pickup in the global economy and a recovery in capital inflows helped India
overcome an adverse monsoon and see a quick rebound in the economy. Both
exports and imports turned positive by November-December, 2009 after
contracting continuously for the previous 12-13 months.
The headline inflation (WPI), after remaining subdued during H1, FY10 increased
at a faster pace in H2, FY10 and came close to 10.0% (y-o-y) in March, 2010. At
the same time, driven by manufacturing and mining sectors, the industrial
production recovered from 1.1% (y-o-y) in April, 2009 to 15.1% (y-o-y) in
February, 2010. Rapid growth in both inflation and industrial production has
prompted the Reserve Bank of India (RBI) to normalise its Monetary Policy and
move its focus to “recovery management” from the earlier thrust on “crisis
management”.
While the demand for bank credit remained highly subdued and skewed
throughout the year under review, credit costs increased for several banks with
the maturing of restructured loans. Moreover, higher level of government market
borrowings and resultant volatility in bond yields posed tough challenges for the
banking industry’s treasury operations.

Bank of Baroda’s Resilience to Shocks

While it is challenging to remain immune to the disruptions created by economic
shocks, Bank of Baroda has been able to withstand the turbulence more

41
effectively during FY09 and FY10 mainly due to its strong business
fundamentals. Again in the year FY10, the Bank could demonstrate consistent
performance by delivering much better quality of earnings, healthier asset quality
compared to banking industry with higher provision coverage and lower interest
rate risk. It has been steadily improving its market share also. It expanded its
global business level by 24.0% (y-o-y) to Rs 4,16,080 crore during the year
FY10.
Despite ongoing global economic challenges, the Bank’s international operations
continued to remain its mainstay and contributed almost 24.0% to the Bank’s
total business and 20.0% to its operating profits in FY10. The Bank’s
international business grew by 31.0% (y-o-y) in FY10 without any compromise
with credit quality. The Bank’s gross NPA in international operations stood at
0.47% and net NPA at just 0.11% in FY10.
One of the greatest strengths of the Bank over a period of time has been the
“trust and confidence” that it enjoys of its stakeholders. Notwithstanding the
unprecedented turbulent conditions created by the global economic meltdown
during the years FY09 and FY10, the Bank’s stakeholders remained firmly
positive on the Bank’s business and financial performance. I am happy to share
with you that the Bank too met the stakeholders’ expectations in terms of
performance, transparency, corporate governance and integrity in guidance
during the last couple of years.

Initiatives
During the year under review, the Bank maintained its focus on introducing new
business, customer and technology initiatives to further strengthen its operations
and leverage its considerable domestic footprint.
The Bank launched a new business process reengineering and organisational
restructuring project “Navnirmaan-Baroda Next” on 22nd June, 2009. The project
envisages redesigning and streamlining of existing processes and structures
including revamp of the branch architecture for better service and sales, higher
revenue growth and improved efficiency. The project is primarily designed to
optimise on available resources to maximise business and profits and to build a
next step for Bank of Baroda, that is, “Baroda Next.”
The Bank achieved 100.0% Core Banking Solution (CBS) for all its domestic
branches reflecting the fastest ever roll out of such solutions in the Indian
banking industry. The Bank’s CBS branches are enabled for inter-bank
remittances through the RTGS and NEFT. Around 94.0% of its overseas
business is also covered under the CBS.
By 31st March 2010, the Bank’s ATM network expanded to 1,315. Moreover,
“Base 24” has been made fully operational for all domestic ATMs and for ATMs
in the Bank’s seven overseas territories. Today, the Bank’s customers enjoy
multiple service channels like Baroda Connect (Internet Banking), Phone
Banking, Baroda Cash Management Services, NRI Services, Depository
Services, etc.

42
The Bank has implemented an Integrated Global Treasury Solution in its major
overseas territories. It has also started providing Online Institutional Trading to its
corporate customers. During FY10, many other important technological initiatives
were taken in the domain of anti-money laundering, document management
system, payment messaging solution, etc.
In order to improve credit flows under the retail business and to consolidate that
portfolio, the Bank has realigned its retail bouquet of products. The Bank has
also launched a new subsidy-linked housing loan scheme under the Home Loan
Product styled as “Interest Subsidy Scheme for Housing the Urban Poor.”
A couple of years ago, the Bank introduced a Retail Loan Factory model as a fast
delivery channel for the benefit of its retail customers. Going by the success of
this initiative, the Bank opened six new Retail Loan Factories during FY10, taking
the total number of such factories to 30.
Leveraging its newly created robust technological platform, the Bank made
“Home Loan and Education Loan Application Modules” online during the year
under review.
The Bank has always believed in making a difference to the society at large. The
Bank took several initiatives on the “Financial Inclusion” front during FY10 to
harness the emerging opportunities for rural and agriculture lending. To augment
its Agriculture advances, the Bank conducted special campaigns for Crop Loans
and Investment Credit. The Bank organized 2,857 Village Level Credit Camps
and disbursed Rs 2,484 crore to over 1.9 lakh borrowers during FY10. The Bank
identified 450 thrust branches across India to enhance agricultural lending. The
Bank formulated various area-specific agricultural lending schemes with various
concessions in the rate of interest, charges, etc., in the interest of poor farmers.
Towards the effective use of technology in rural agricultural lending, the Bank
has introduced IT-enabled smart card based technology for financial inclusion.
With nine additional Baroda Swarojgar Vikas Sansthan (Baroda R-SETI) Centres
opened during FY10, the total number of BSVS has gone up to 25. Over two
million no-frill savings accounts have been opened so far. As part of the Financial
Inclusion Initiative, the Bank has opened four Financial Literacy and Credit
Counselling Centres (FLCCs) christened as “SARTHEE”.
Adding its offerings in wealth management products, the Bank has entered into
tie-up arrangements with two more leading asset management companies in
FY10 for distribution of mutual fund products. The Bank’s joint venture in life
insurance, in association with Andhra Bank and L & G (U.K.) – IndiaFirst Life
Insurance Co. Ltd. commenced its operation during the year. The IndiaFirst has
received an overwhelming response from the Bank’s customers across the
country, making the company the fastest growing Insurance company to reach
Rs 100 crore premium collections in the first 100 days of its launch.

Business & Financial Performance

43
The Bank has reported a healthy growth in its business and profits with
improvement in all key parameters during FY10.
As stated earlier, its Global Business touched a new milestone of Rs 4,16,080
crore in FY10 reflecting a growth of 24.0% (y-o-y). Both its domestic deposits and
advances increased at the above-industry pace of 22.4% and 21.3%,
respectively. The Bank’s domestic low-cost or CASA deposits grew by an
unprecedented 25.1% taking the share of domestic CASA deposits to 35.63% in
FY10 versus 34.87% in FY09. Its Social Sector Advances or Priority Sector
Credit surpassed the mandatory requirement and posted a growth of 24.0% (y-o-
y). The Bank recorded a growth of 44.0% in SME credit, 27.0% in farm credit and
24.0% in retail credit reflecting a well-diversified growth achievement.
In its overseas business, while the Bank’s deposits grew by 36.0% (y-o-y), its
advances grew by 25.0% during FY10. Within total overseas deposits, the
customer deposits grew by 33.7%. Total assets of the Bank’s overseas
operations increased from Rs 51,165 crore to Rs 68,375 crore registering a
growth of 33.6% during the year under review.
The growth in profits was led by healthy topline growth, prudent management of
deposit costs and better operating efficiency. The Bank’s Net Profit at Rs
3,058.33 crore for FY10 reflected a robust year-on-year growth of 37.3%.
As the Bank’s primary objective has been to grow with quality, the Bank focused
on containing the impaired assets to the minimum possible level. While the Gross
NPA in domestic operations stood at 1.64% at end-March 2010, the same for
Overseas Operations was at 0.47%. In spite of growing slippages for Indian
banking industry during FY10, our Bank succeeded in restricting its global Gross
NPA level to 1.36% and Net NPA level to 0.34% by end-March, FY10. While the
RBI has extended the deadline for recovery from the Agricultural Debt Relief
accounts till end-June, 2010, the Bank has continued to classify these accounts
as NPA as a prudent measure. Despite this, the Bank enjoys one of the lowest
ratios for Gross and Net NPA in the industry. The Bank’s NPA coverage ratio at
74.90% as on 31st March, 2010 has been comfortably above the norm of 70.0%
set recently by the RBI.
The Bank’s Return on Average Assets (ROAA) at 1.21%, Earnings per Share
(EPS) at Rs 83.96, Book Value per Share (BVPS) at Rs 378.40, and ROE
(Return on Equity) at 22.19% reflect a significant improvement over their
previous year’s levels. The Bank’s Capital Adequacy Ratio too stood at the
healthy level of 14.36% with the Tier 1 capital at 9.20% during FY10. The Bank’s
Cost-Income ratio also eased from 45.38% to 43.57% on year-on-year basis.

Looking Forward
Bank of Baroda’s long standing reputation for financial soundness, long-term
customer relationships and proactive management are as important today as
ever. Going forward also, the Bank would continue with its thrust on growth with
quality. At the same time, it would try to grow above the industry average on the
back of strongly positive growth outlook for India in FY11.

44
The Bank would try to protect or improve further the current levels of its key
financials like ROAA, ROE, EPS, BVPS, asset quality, etc., through its dedicated
focus on low-cost deposit mobilization & fee-based income, efficient pricing of
deposits and loans, reduction in high cost or low yielding bulk business and
through improved credit origination and effective credit monitoring.
In all core operations, the Bank has put in place strategies that seek to address
near-term challenges as well as to seize opportunities to strengthen its
foundations for sustainable growth. The focus of these strategies has been on
well-balanced, qualitative growth, service and operational excellence and people
management.
In fact, the Bank has been aggressively recruiting the best possible talent in the
country from the premier Institutions during the last couple of years. The Bank
has been working on the business process reengineering (BPR) project in
consultation with the Mckinsey & Co. so as to achieve the optimum use of
technology and right skilling of the manpower to yield maximum customer
satisfaction. During FY10, the Bank also launched a series of marketing
campaigns to promote its brand value. The same would continue in future also, in
order to strengthen the Bank’s market share both from the asset and liablity
sides.
The Bank has been actively designing strategies for enhancing sales and raising
brand equity through continuous market research. The Bank has also focused on
evolving a Strategic Mass Communication and Events Plan to ensure brand
enhancement. Besides this, significant initiatives in customer education would
continue for putting in place an effective Customer Relationship Management
system in the Bank.

Bank’s Corporate Goals & Strategy

For the year 2010-11, the Bank has selected the motto “Leveraging technology
for augmenting business growth and profitability.”
The ultimate objective of the Top Management of the Bank is to equip the Bank
with more stability and growth-orientation. To attain this goal, we have adopted a
Business Model that focuses on achieving sustainable growth. This model has
four pillars – Healthy CASA, Well-diversified Advances Portfolio, Strong back up
of Non-interest income and Stringent NPA Management. The Bank is well geared
to ensure that its performance will be driven across all these parameters.
The Bank is aware of the fact that the market leadership can be achieved only
through a visionary, strategic and sustainable model of pursuit and
perseverance. The success lies in attaining the acceptance of our stakeholders
about the Bank’s core values, passion for customer service and the credibility of
leaders, which alone would give our Bank a unique place in the banking space.
In a bid to gain better market share, we will work relentlessly to provide financial
stability and brand value that matters the most.

45
Behind every dark cloud there is a silver lining.
Today the world is in a financial mess. Everyone is talking about financial crisis
all over the world. But nothing lasts for long. Everyday we can't expect our
economy to be in boom. The economy tends to move in various phases i.e. from
expansion to peak and then peak to recession and along the way of "Phase to
recovery" and once again to peak. This is because of two human emotions.
Greed during expansion as the cause and sufferance during recession as the
result .

POSITIVE IMPACTS ON INDIAN

ECONOMY
Emergence of a new economy
Perhaps this is the first time during such crisis period when world's big
economies like US is struggling to overcome this situation India was able to
invest money for launching of chandrayaan-1.This is the time when world's most
powerful economies are suffering more than Indian economy. It affected
developed country economies more than developing country's economy. In USA
Lehman Brothers has filed for bankruptcy, Merill Lynch has emerged with Bank
of America, Washington Mutual Operations are being apprehended by FDIC and
Wachovia is being auctioned by Citigroup .In comparison to such terrific
conditions India is in a better place. It is worth underlining that we have a number
of companies still reporting successes at this time. Some of the businesses
bucking the trend at this stage have diversified into a number of areas and others
have exposure to export markets. Whilst overseas markets are increasingly
tough, but the businesses have been able to benefit from the weakness of the
money value which has allowed exporters additional competitiveness with their
international trade.

Expose of weaknesses in the economy

The major role of financial crunch is that it exposes the political, structural and
financial weaknesses of an economy. It explores efficiency in the financial
market, transparency and accountability of new or reformed organizations,

46
opportunity for creating new jobs and technologies, sufficient fund for investment
in R&D innovation and education.
During the financial crisis period, the extent of sufferance of an economy shows
its weaknesses. Because if the rest of the world gets disturbed and capital flows
and liquidity shrinks, there is bound to be spillovers not just on India but all over
the world.. Regulators are trying to assess the situation and taking steps to
insulate their economies from the unnecessary shock. The fact that we have not
been affected reflects the merit of proceeding slowly. We have actually been
reforming very slowly and gradual pace of reforms has some advantage and we
should continue with that pace. India should endeavor to make the regulatory
system more sophisticated to ensure that the country does not run into regulator
gaps that precipitated the present global financial crisis. Our country pursued
economic reforms in a calibrated manner and escaped the fallout of global
financial crisis. So these expose of weaknesses will definitely help India's fast
growing economy in the long run.

Cost stabilization in real estate market.

Confederation of Real Estate Developers Association of India ( CREDAI) and
National Real Estate Development Council (NREDC), both builders association
with around 3500members each across the country, have appealed the
members to slash prices of their proporties.Builders feel that cutting down prices
will spur buyers and restore confidence. This development will enable middle-
class families to think of having their own homes as owning a house had become
a distant dream because of unrealistic rise in real estate properties. By
developing middle-class families it is for sure that Indian economy will be affected
positively in long run. Because in comparison to any other country Indian middle-
class families are significantly improving in monetary measures.

Rationalization of Salary Structure in IT Industry

This financial crisis will have a positive impact on the IT industry. This sector has
seen an unprecedented rise in salaries and increments. But with this financial
crisis this cannot go further. No economy can afford 25% to 30% salary hike per
industry per annum. So now IT industry slowdown will ensure better quality of
work and also prevent attrition. Today the IT professional will think twice before
changing their jobs. Along with it funds spent on recruitment, training and
development and retention of man power will come down considerably. Earlier
the scene was quite different. With that lucrative growth rate of salary structure,
IT professionals were changing jobs frequently. It had a bad impact on the job
culture of the industry in particular. Frequent change of jobs also affected the
overall productivity of the industry. But now the scene is totally reverse in nature.
As a result of this financial crisis professionals are not only in favor of changing
the job but also ready to work more with the same salary with the objective to
keep his job secure. Definitely it would help in the improvement of this sector as
well as the productivity of the IT industry.

47
Performance Appraisal is gaining ground
Today's businesses are under a great deal of pressure to perform. With
increasing customer expectations, global competition, costs of goods and
services and above all because of financial crisis, many companies struggle to
meet profit forecasts. As a result, companies are beginning to discover the
powerful link that exists between employee performance and financial success.
Many companies are relying more heavily on human capital to address consumer
demands while lowering operating costs, and improving financial position.
Deploying employee performance appraisal programs that lead to measurable
improvements in employee performance can provide the human capital leverage
companies need to overcome many of today's business obstacles.
Earlier as the job opportunity was more for the people; the role of performance
appraisal was less. To understanding how efficient your employees perform was
critical to your business. Every year, thousands of businesses were losing
millions of dollars in revenue due to inefficient employees. Now as this financial
crisis arises everyone is trying to save one's job. Watching the changed job
environment use of Performance Appraisal is gaining its ground day by day. As a
result, everyone is ready to give his 100% to his job. Fear of losing the job
improves the performance of the employees as a whole.

Austerity is the targeted path

Today Warren Buffet advice of austerity is practically followed by many countries.
Cost cutting seems to be the sole solution to this contemporary problem. Starting
from Govt. sectors to big private corporate sectors, cost cutting is there
everywhere. Earlier when big MNCs were spending recklessly for promoting their
business where staff luxury was of major portion, today they are taking a second
thought before spending a single penny.
Splurge will no more be the watchword and greed will no more be good in
corporate parlance. Financial crunch will force the companies to eliminate all
forms of wastage and follow an austerity regime. India's greatest ability and
strength is its tolerance and ability to adapt to difficult situations. It is now trying
to tackle the issue of panic resulted out of depression and then pump massive
amount of liquidity and confidence into the system. India's population plays the
most crucial role here

Best place for outsourcing

"It is time to open up banking and insurance sectors for further foreign direct
investments as multinational insurers and bankers are willing to invest more in
India. There is a talk that FDI limit in insurance might be hiked to49%. And this
time is the best time to do it", Prabhu Guptara, Executive Director, Think-Tank of
United Bank of Switzerland (UBS).

48
According to Obama Govt. US's priority would be given to curtail costs, which
would include cutting wage expenditure and there by outsource work to countries
like India.
In view of high credibility, Indian banks should also expand retail and other
businesses abroad. There is also a need for more innovative products and global
competitiveness.
India continues to be the best place or top destination for outsourcing. Two
factors are responsible for it. First when it comes to salary costs India is
extremely competitive, second Indian outsourcing firms have now matured into
true global companies that can offer best services at competitive prices. India is
coming under the list of top outsourcing destinations with China, Brazil, Mexico,
Malaysia and Chile. India has the second lowest Its-BPO salary base of $7,500-
$8500 followed by China. Another advantage of India in this section is that India
is having one of the largest producers of English-speaking graduates including
management and engineering graduates. Such a huge number of graduates will
definitely result in offering higher value-added services to the customers. Which
is very weak in china as the number of youth is less here. . Today having the
maximum no of youth our country is ready to adapt to this situation. Efficient
young personnel are India's greatest asset here.

Opportunities for International trade.

When looking in particular at International Trade, there are huge opportunities for
when the world economy begins to grow again and demand returns to foreign
markets. The competitive position of Rupees only adds weight to the potential
that can be realised.
Today countries all over the world are interested for trading with India. It will have
a great impact on our foreign fund reserve and forex market.

CONCLUSION

49
While it is uncertain how prolonged and deep the recession will be, it can be said
with certainty that demand, and subsequently growth, will return. It is therefore
imperative that, when this happens, policymakers have a recovery plan in place.
This plan should act to foster growth in the short-term and lay the foundations for
economic stability in the long-term. There is currently a high level of activity
amongst the business support community with a key focus on ensuring
businesses survive the downturn. A challenging and critical focus on the basics,
or fundamentals of businesses, is likely to give local companies the best chance
of survival over the next year.
The growth of the public sector and the narrow reliance on financial services for
growth needs to change, with manufacturers and exporters having particular
attention paid to them. After watching so many positive points we Indians can
ourselves that we are quite in a safer place in comparison to many developed
countries economy. To conclude lets hope for a stronger India by rectifying all its
economic weaknesses after this so called financial crunch.

REFERENCES
50
• Ghosal SN (2009) "Global Financial Crisis- Cause and Impact" Icfai
Reader.Mar2009
• International Monetary Fund (2008) "Global Financial Stability Report",
October 2008.

• Larry Elliott, "Credit crisis- how it all began" The Guardian, (Aug.5, 2008).

• Reserve Bank of India (2008), Annual Policy Statement for the year 2008-
2009 April.

• Singh Dhananjay (2009) "Global Financial Crisis –Positive for India", Icfai
Reader, Jan2009.

• Vardhani D and Sridevi J (2009) " Downturns and Impact of Global

Meltdown" Icfai Reader .Mar2009

• Venugopal V. (2004) "India and Global Economy" The Asian Economic

Review, vol.46, No.3 December 2004

• World Bank (2008) "Global Development Finance2008", June.

WEBSITES
www.bankofbaroda.com

www.indianmba.com
www.investopedia.org
www.wikipedia.org

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