Economic Slowdown and it’s effects on big business

An Economic slowdown is a decline in a country's gross domestic product (GDP) growth for
two or more consecutive quarters of a year.

An Economic slowdown is also preceded by several quarters of slowing down. An

economy, which grows over a period of time, tends to slow down the growth as a part of the
normal economic cycle. An economy typically expands for 6-10 years and tends to go into a
recession for about six months to 2 years. A recession normally takes place when consumers
lose confidence in the growth of the economy and spend less. This leads to a decreased
demand for goods and services, which in turn leads to a decrease in production, lay-offs and a
sharp rise in unemployment. Investors spend less; as they fear stocks values will fall and thus
stock markets fall on negative sentiment.

Impact on big business

As sales revenues and profits decline, the manufacturer will cut back on hiring new

employees, or freeze hiring entirely. In an effort to cut costs and improve the bottom line, the
manufacturer may stop buying new equipment, curtail research and development and stop new
product rollouts (a factor in the growth of revenue and market share). Expenditures for marketing
and advertising may also be reduced. These cost-cutting efforts will impact other businesses,
both big and small, which provide the goods and services used by the big manufacturer. 
Impact on Indian banking sector

The Recession that began in December 2007 impacted the revenues and profitability of
businesses worldwide. In India, it was the real economy that got impacted first — on account of
exports and the drying up of overseas finance for many firms. Banks were affected indirectly by
the slowing down of the economy. Indian banks had not just survived the crisis but appear to had
emerged even stronger from the recession and even gone ahead and post reasonable profits in
the year 2008- 2009.

Unlike in the west where credit supply had collapsed, credit grew at 25% in 2007-08 and
by 24% in the next year.

Influenced by the global financial turmoil and repercussion of the subprime crisis, the
global banking sector had witnessed some of the largest and best known names succumb to
multi-billion dollar write-offs and face near bankruptcy. However, the Indian banking sector has
been well shielded by the central bank and has managed to sail through most of the crisis with
relative ease.
Inter-sectoral analysis : Private and Public sector

Note :- These figures have been taken from www.finmin.nic.in

The review of the Monetary Policy by the RBI for the third quarter of 2008-09 said:

“There has been a noticeable variation in credit expansion across bank groups. Expansion
of credit by public sector banks was much higher this year than in the previous year, while
credit expansion by foreign and private sector banks was significantly lower.”
Deposit accretion

This credit expansion by the banking sector was also reflected in the deep divergence in
the pace of growth in deposits among the banks. It was only the public sector banks which could
maintain the pace of growth in deposit accretion at 24.2 per cent.

Deposit accretion in foreign banks fell sharply from 34 to 12 per cent and for private sector
banks from 27 to 13 per cent. Backed by the steady pace of growth in deposits, the growth in
public sector banks disbursal also grew quite significantly

Meanwhile, there was a deceleration in credit extension by foreign and private sector

banks during 2008.

Capital Adequacy Ratio
Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting
the time liabilities and other risk such as credit risk, operational risk.

Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a
percentage of its risk weighted credit exposures.

Capital adequacy ratio is defined as: CAR = Capital/Risk

Indian banks also enjoyed higher levels of money supply, credit and deposits as a percentage of
GDP in FY09 as compared to that in FY08 showing improved maturity in the financial sector. 
The Five reasons why big banks were able to beat the Global Economic slowdown and rake in
the profits are
:

1. Underwriting increases provides investment banks with more income as businesses go to

investment banks. Banks that do the underwriting collect fees, and if they actually make the
loans, they also collect the interest.
2. Trading revenue is also up as investors try to play the market, getting in when prices are low
and trading to take profits on the rallies. Many of the big banks (like Goldman) do over the
counter trades, so they get commissions as well.
3. Less competition is the result of failed banks and takeovers. This means a bigger piece of the
pie for those banks that are left.
4. Toxic assets have been working their way through the system. Additionally, some banks (like
Goldman) had limited exposure to toxic assets to begin with.
5. Retail banking has been providing a boost. People still need a place to keep their money.
With a lower Fed funds rate, they can pay less in interest to their savings customers, while still
charging between 5% and 10% interest (more for credit cards) on loans they make. That
difference is resulting in profitability.
Cooping of Strategy

 strict regulation and conservative policies adopted by the Reserve Bank of India had
ensured that banks in India were relatively insulated from the travails of their Western
counterparts.
 Indian banks are well-capitalized with a low level of non-performing assets (NPAs), The
ratio of net NPAs to net advances is down to 1%, down from 9% a decade ago.
 The Reserve Bank of India had initiated a series of steps to ease the liquidity problems
being faced by banks.
o It had cut the cash reserve ratio to 5.5% and the repo rate at which the central
bank pumps liquidity into the system to 7.5%.
o It has also reduced the SLR or statutory liquidity ratio to 24%, down from 25%
earlier.

 The strong capitalization of Indian banks, with an average Tier I capital adequacy ratio of
above 8 per cent, was a positive feature in their credit risk profile.
 India’s growth process had been largely domestic demand driven and its reliance on
foreign savings has remained around 1.5 per cent in recent period. It also had a very
comfortable level of forex reserves.
Objective & Justification

Banks act as important players in the financial markets as they play a vital role in
the economy of a country. The banking sector in India should be structured in such
a way that it can deal with any adverse economic crisis or breakdown created by
global environment.

 For this reason it is essential to study all the factors which were responsible
for the economic slowdown.
 Preventory majors should be taken to avoid the impact of any further global
crisis on banking sector of India.
 Banks should be restructured in such a way that if further there is a
possibility of slowdown then it has minimum effect on India

 Greater transparency about the risk in banks' portfolios.