The playbook adopted by the Reserve Bank of India in times of crises, front led by champion banks and supported by robust deposit insurance, is more suitable for cut, copy and paste by central banks of developed markets, according to State Bank of India’s economic research report “Ecowrap”.

The report put together by SBI’s economic research department observed that short term borrowing like uninsured deposits by FRB (First Republic Bank) of $30 billion from a suite of 11 different US based banks for an ultra short term period of 90 days, is short-sighted.

In sharp contrast, in India in 2008 and 2020, the consortium of banks or champion banks handheld the ailing banks for a multi-year period. For example in 2020, it was for at least 3 years.

“We also find the US ‘investment’ pattern inconsistent, non-secular with asset sizes of participating banks.”

“As many banks in the list are predominantly investment banks, having secured funds from diverse clients (and, not customers or depositors in common sense) with a clear mandate to generate alpha, a la hedge funds, we are apprehensive of another ALM mismatch, this time possibly for larger players if select clients question the wisdom behind the move,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

The report noted that analysis of insured customer deposits across multiple geographies initiated in the wake of bank runs across developed economies reveal USA’s top 10 banks deposits are insured in the range of 38.4 per cent to 66 per cent.

Bank deposits

Another interesting trend that has been observed in the USA is that top banks deposits, on an average, have been insured to the tune of around 50-55 per cent, while their smaller bank deposits are insured in the range of 30-45 per cent only.

In contrast, smaller bank deposits in India such as regional rural banks, co-operative banks, and local area banks are better protected at 82.9 per cent, 66.5 per cent, and 76.4 per cent respectively, per the ERD’s assessment.

For cross country deposit insurance (DI) coverage and per capita income, the ratio of DI cover and per capita income is 2.53 for India, one of the highest, emphasised the ERD team.

The Government of India had notified a revised, incremental deposit insurance in 2020 (upping the cover five times to ₹5 lakh), after 27 years.

Least foreign claims

The report underscored that Indian banks are the epitome of resilience. The ERD assessed that foreign claims on India are $104.2 billion on immediate counterparty basis and $81.5 billion as guarantor basis.

When compared with other major countries, India has least foreign claims, both as counterparty basis, and also as guarantor basis, it added.

Further, ERD’s ratio of foreign claim to domestic claims is also least among countries, signifying that India’s banking and financial system is very disciplined and no international balance sheet contagion can start from India.

Maturity wise also, international claims on India are the least among major countries.

The ERD suggested that an incisive stress test of banks, more of SIBs (systemically important banks), could be pertinent for advanced economy regulators to restore market faith in banks.