Resilient & robust

After the collapse of two US banks — Silicon Valley Bank (SVB) and Signature Bank — and Europe’s Credit Suisse Bank in Switzerland, questions are being raised on the strength of Indian banks and the Indian banking system. Union Finance Minister Nirmala Sitharaman discussed this issue with bank heads on March 25, 2023, and the Reserve Bank of India (RBI) is also keeping an eye on the ‘business model’ of Indian banks.

RBI believes that the reason behind the bankruptcy of the two banks in the USA and Credit Suisse Bank of Switzerland was the faulty ‘business model’. On the contrary, India’s banking system remained resilient during the COVID period, and remains strong even today, because the ‘business model’ of Indian banks has been impeccable. The banking sector of the country remains largely unaffected amid the drowning of foreign banks, rising inflation and geopolitical crises.

The US-based SVB provided loans to startups, venture capitalists and technology companies, in addition to taking deposits from large businesses, while Signature Bank provided loans primarily to the real estate sector, in addition to taking deposits. Contrary to banking norms, SVB had given too many loans to a single sector. A large amount of cash was deposited in this bank after the pandemic. Therefore, the bank had invested excess deposits in long-term bonds, but later, due to geopolitical crisis, inflation, jump in loan interest rates etc., the asset-liability balance of the bank deteriorated, and the bank became unable to meet the cash requirements of the customers. Similarly, high cash withdrawals by Signature Bank customers led to a liquidity crunch, as the bank accounted for a quarter of the USD 103 billion in deposits held in cryptocurrencies by September 2022, and had also kept giving more loans to a particular sector. At the same time, Europe’s Credit Suisse bank sank due to corruption. Since its sinking would have adversely affected the Swiss economy, the Union Bank of Switzerland (UBS) —the country’s largest bank — took over the bank under the direction of the government.

SVB had 8,500 employees and Signature Bank had 2,500 employees, and Credit Suisse Bank had around 50,000 employees, including 15,000 employees working in India. Both the banks in the USA were small, while the bank in Europe was a bit bigger.

According to Commerce and Industry Minister Piyush Goyal, the number of recognised startups in the country had increased from 452 in 2016 to 84,012 in 2022. Furthermore, according to an estimate, instead of Indian startups, the money deposited in SVB was from US-based startups. Hence, it did not have much adverse effect on the Indian startup ecosystem. After the bankruptcy of Credit Suisse, its convertible bonds worth USD 17 billion were written off, raising the risk of India’s additional tier-1 bonds, but this also did not adversely affect Indian banks.

The Federal Deposit Insurance Corporation (FDIC) insured deposits of USD 250,000 for SVB and Signature Bank customers. Therefore, customers who deposited up to this amount got their money back, but customers who deposited more than this amount lost their money. According to a report by Raymond James & Associates, only 38.4 to 66 per cent of deposits in the top 10 banks in the US are insured, while 10.7 to 13.6 per cent of deposits in SVB and Signature Bank were insured.

Notably, the public money deposited in Indian banks is almost safe. According to statistics, till March 31, 2023, 98 per cent of public money deposited in Indian banks was insured, which means even if a bank sinks in India, almost 100 per cent of the common man’s money will be safe.

The circumstances of Indian banks are different from the banks in the USA and Europe. Indian banks have been working according to regulatory policies, and they make new loan policies every year. Therefore, they cannot lend to a single sector or single industry at any cost. The banking regulator in India continuously reviews the functioning of the banks. Indian banks are forbidden from using the entire deposit amount of customers for giving loans. They are required to keep a certain amount with the Reserve Bank of India as a cushion.

All banks work by maintaining an asset-liability balance. The RBI always works to maintain the liquidity in the banking system. According to RBI Governor Shaktikanta Das, the current ‘business model’ of Indian banks may pose a risk to certain parts of banks’ balance sheets, but this will not lead to a major crisis. Das also believes that Indian banks will be able to meet the minimum requirement of capital adequacy ratio even in times of adversity or crisis. He affirms that Indian banks have registered improvement on the front of reducing stress on assets, growing revenue, and increasing profits by reducing gross non-performing assets (NPAs). The NPA ratio of banks was to come down to 4.41 per cent in December 2022 from 5.8 per cent in March 2022 and 7.3 per cent on 31 March 2021.

According to a report by Moody’s Investors Service, the asset quality of Indian banks and Southeast Asian countries will remain stable in 2023, and Indian banks will benefit from smooth operations. According to Moody’s, rising interest rates amid high inflation will lead to a gradual increase in margins, which will boost banks’ earnings. At present, Indian banks can deal with the possible increase in NPAs as they have excess capital and are able to make provisions for NPAs. Moody’s also believes that the inflation rate in India will fall further, which appears true because the inflation rate in India has come down to 4.7 per cent in April of 2023 — the lowest since October of 2021. In March, it was 5.7 per cent. Contrarily, inflation remains high in many countries of the world.

Moody’s has upgraded the ratings of nine Indian private and public sector banks to ‘stable’ from ‘negative’ outlook over the past months. The banks whose ratings have been upgraded by Moody’s include private sector Axis Bank, HDFC Bank, and ICICI Bank as well as public sector banks including Bank of Baroda, Canara Bank, Punjab National Bank, Exim Bank and Union Bank of India.

In the Union Budget 2023-24, it was proposed to amend the Banking Regulation Act and the Reserve Bank of India Act to improve the functioning of banks. Accordingly, efforts are being made to improve the banking system. For the past several years, the government has been taking appropriate steps to strengthen the banking sector, which has resulted in a phenomenal increase in the profits of the banks and improved their asset quality.

The Indian banking system has remained resilient and strong in the face of all odds. It has not been affected by recent events in the global financial ecosystem. At present, the ‘business model’ of Indian banks is very strong, and for this reason, the drowning of foreign banks did not affect Indian banks. The future appears bright!

Views expressed are personal