The crisis at Credit Suisse may be a warning signal of potential global liquidity tightening, but Indian banks are resilient enough to absorb any liquidity stress, given their strong structural framework and sustained credit demand.
Local currency liquidity is robust because of the strong funding structure of Indian banks, 80 per cent of which comprises deposits. Strong government linkages also ensure depositor confidence and significantly lower the probability of deposit runs unlike the recent events in certain US banks, said analysts.
“If all the unrealised losses that banks are sitting on through their HTM book, were to be recognised in FY23 under a stress scenario, the RoA impact would be manageable to about 40 bps by our assessment. The excess investments for the banking sector over and above the regulatory HTM limit is roughly 5-6 per cent which is already marked-to-market,” Saswata Guha, Senior Director, Financial Institutions at Fitch Ratings India said.
Precedence shows that while there have been bank failures in in India, there has never been a bank default because the authorities have stepped in to provide support--directly or indirectly, he added.
What also works for Indian banks is the clear demarcation between pure commercial lending and other services such as investment banking or wealth management, which ensures that the fallout from any issues in other verticals do not impact the core balance sheet and subsequently depositors.
“Credit Suisse is not a pure commercial bank. It is an investment bank and also deals with wealth management and that’s where the money has been evaporating and the investment bank has been making losses. This is why investors were apprehensive to lend more and liquidity issues came in,” Madan Sabnavis, Chief Economist at Bank of Baroda said.
Therefore, the contagion on the Indian banking sector looks to be minimal and percolation of liquidity stress, if any, is likely to be through the exposure of Indian companies to these banks, like in the recent SVB collapse, he said, adding “we need to be watchful on this aspect”.
Further, growth drivers in India are still underscored by domestic factors which are holding up structurally and should support credit growth, analysts said, adding that competitive pressures will also prevent banks from passing on rates hikes entirely to customers.
“Liquidity tightening could create some issues but banks will continue to lend in a calibrated manner. Credit growth in FY24 is likely to be slower than FY23 but banks are also chasing deposits because credit demand continues to be there, and could rise due to government spending/capex,” said Saurabh Bhalerao, Associate Director and Head, BFSI Research at CARE Ratings, adding that Indian banks are coming off an asset improvement cycle and so they are also in a good place.