THE financial crisis that has rocked the US markets over the past few weeks finally reached Indian shores last week, when speculators tried to raise a scare about the liquidity of the country’s largest private sector bank.

But a firm reiteration of its strong position by K.V. Kamath, CEO and managing director of ICICI Bank – which is also the country’s second-largest bank – and solid backing from finance minister P. Chidambaram and the Reserve Bank of India (RBI), the country’s central bank, saw the return of stability.

ICICI Bank, which has grown spectacularly in the past few years, has been targetted by speculators often in the past. Says Kamath: “We have often evoked adverse perception and undue criticism for our growth. We have always suffered from the worst perception.”

Last week, rumours spread across the country of ICICI Bank facing a liquidity crisis, resulting in a run on the bank’s ATMs. Long queues formed outside many of the branches and ATMs – a repeat of what had happened a few years ago – as depositors panicked. But the bank ensured continuous supply of cash. Kamath described the rumours as baseless and malicious.

On the stock markets, the ICICI Bank scrip has been hammered by speculators over the past few months. In January, the scrip was trading at a high of Rs1,465, but in recent months – and especially after the unfolding of the financial crisis in the US – it took a heavy beating. The share, which was trading around Rs720 in the first week of September, plunged to Rs490 three weeks later.

And on Tuesday last, it fell to a record low of Rs458. But reassuring statements by Kamath, Chidambaram and the RBI saw a sharp recovery in the scrip. Chidambaram notes that ICICI Bank is well capitalised and the Indian banking sector itself is well regulated. The RBI pointed out that the private sector lender has enough liquidity.

The Securities and Exchange Board of India (SEBI), the capital market watchdog, also urged investors not to panic and get swayed by rumours. The bank urged SEBI to probe the role of speculators in hammering the scrip.

The capital market regulator summoned a meeting of leading foreign portfolio investors and was assured that they were not involved in rigging the stock price by heavy short selling.

“We have a net worth of over Rs470 billion and a capital adequacy ratio of 13.4 per cent, as against a regulatory requirement of nine per cent,” remarks Kamath. The bank has consolidated total assets of Rs4.84 trillion, which is diversified across a wide range of assets in India and abroad.

In the UK, the bank has a capital adequacy ratio of 17.4 per cent. It has invested about $3.5 billion in banks and financial companies in the UK and has a loan portfolio of $4 billion. About 98 per cent of the investments in the UK are rated investment grade and above and 89 per cent rated ‘A’.

THE government has assured investors that the Indian banking system is virtually insulated from the crisis rocking the US and Europe. According to Chidambaram, Indian banks are well capitalised and the markets are sound. “We are monitoring the (international) situation round-the-clock,” he adds.

The RBI, which has backed ICICI Bank, has, however, sought data from all the leading Indian banks – both public and private – about their exposure to troubled financial entities in the US and Europe. Banks have been asked to furnish details of their exposure to Lehman Brothers Holdings Inc, American International Group, Washington Mutual, Wachovia Corporation and Fortis.

Leading banks have been asked to disclose both on- and off-balance sheet exposures, to gauge the risks and to understand the implications of the financial crisis on the country’s system. So far, only ICICI Bank has admitted its exposure to Lehman Brothers – worth $83 million, which is less than 0.1 per cent of its total consolidate group assets of $103 billion. The bank hopes to recover at least 50 per cent of the amount.

The RBI has also asked Indian banks to unwind interest rate swap transactions with a Lehman Brothers subsidiary. It is also planning special audits of some of the banks to find out the true extent of their exposure to the bankrupt American investment bank.

According to industry sources, private Indian banks might have to book losses of a maximum of Rs4 billion because of financial crisis in the US, which is negligible as compared to the overall size of the market. Public sector banks do not have any significant exposure to the now beleaguered American majors.

In fact, some Indian banks are planning to join hands with international ones to take over the structured products business of Lehman Brothers in India. Britain’s Barclays bank, which has acquired the North American operations of Lehman, is also keen on acquiring the Asian (including Indian) operations.

Lehman is learnt to have an exposure of nearly Rs35 billion in the Indian markets, though structured products account for merely Rs8 billion.

INDIA’S insurance sector has also not been hit by the turmoil in the US market, especially the $85 billion bail-out – and the virtual nationalisation – of the American International Group (AIG). The American insurance major has a 26 per cent stake in two joint-ventures in India with the Tata group – Tata AIG Life Insurance and Tata AIG General Insurance.

According to the Insurance Regulatory and Development Authority (IRDA), the American financial crisis will have virtually no impact on the financial health of Indian insurance companies.

The Tatas, India’s top business group, has also assured the IRDA that all payment obligations of their two joint venture units will be met by them. According to finance minister Chidambaram, the insurance regulator has been assured by the Tatas of meeting all the obligations and that the customers of the two companies have nothing to fear.

While worried policy-holders made anxious queries about the fate of their policies with the Tata AIG firms, the regulator did a quick analysis of their financial health and assured the public that the solvency margins of the two firms were comfortable and above the prescribed minimum of 150 per cent. Tata AIG Life had a solvency margin of 300 per cent and Tata AIG General Insurance of 176 per cent. No Indian insurance companies have invested abroad, the regulator points out.

Tata AIG Life in fact, plans to launch an aggressive expansion plan. The company wants to add another 100 branches over the next year. It already has about 400 branches across the country and employs about 8,500 persons.

The life insurance venture between Tatas and AIG – both promoters had injected nearly Rs1 billion into the venture recently – will need additional capital of Rs2.5 billion over the next two years to meet solvency requirements, looking at the rapid pace of growth of its business. AIG might have to infuse an additional Rs650 million. Considering the massive $85 billion rescue operation launched by the US government, the Indian venture’s expansion plans is unlikely to be affected, according to insurance industry sources.

The Indian life insurance industry is expanding at a massive clip of 60 to 70 per cent annually and new players are planning to set up operations.