India’s banks less prone to Silicon Valley Bank kind of episode: FinMin report

The Indian banking system is less prone to US’ Silicon Valley Bank (SVB) kind of incidence, a Finance Ministry report said on Tuesday.

“The multifaceted nature of RBI’s regulatory actions, the improved bank balance sheets and the attunement of the Indian banking system to frequent interest rate cycles augur well for India’s financial stability and significantly reduce the probability of an SVB-like event occurring in India,” the Monthly Economic Review (MER) prepared by the Economic Affairs Department said.

Further, these factors will also help support the medium-term growth trajectory to remain on course. However, rising uncertainty leaves no space for complacency and dynamic risk identification and management will be critical, especially in the current credit upcycle, the report added.

The SVB saga

The 40-year-old SVB was once the fuel behind the start-up flight. More than 2,500 venture capital firms banked with them, and half of all venture-backed start-ups were its customers. It went belly-up in 48 hours flat, making it one of the fastest crashes in history. In 2022, Forbes named Silicon Valley among America’s Best Banks, and Moody’s gave an ‘A’ rating! The rating meant that Moody’s judged it to be of upper-medium grade and subject to low credit risk. A year after the bank collapsed mainly on account of continuous rise of interest rates by Federal Reserve as value of the bonds fell in a heap and SVP had more and more investment in these bonds.

MER said the collapse of a few regional banks in the US and the takeover of the crisis-hit Credit Suisse Bank by the Union Bank of Switzerland (UBS) have sent ripples across the global banking industry and posed fears of a contagion effect across economies. The event has also raised the pertinent question among policymakers on the vulnerability of their financial system to such a collapse, especially in Emerging Market Economies (EMEs) that may lack the fiscal space to calm financial markets with fiscal packages.

RBI supervision

The report said that banking supervision is robust with the RBI’s overarching coverage of institutions, regardless of asset size, in its bi-annual assessment of financial stability. Macro stress tests are also performed from time to time on individual banks. Investment in held-to-maturity (HTM) securities is limited to 23 per cent of deposits, reflecting an effective insulation of asset value from adverse market developments, it said.

Finally, the rapid withdrawal of deposits is unlikely as 63 per cent of the deposits contributed by the households are considered sticky, it said. All these factors make Indian banks different from those in the US and Europe which faced problems following the unwinding of tight monetary policy.

“Since the spread is not as large in India’s case, withdrawal of deposits en masse remains an improbable event. The April 2023 RBI Monetary Policy Report also notes that the transmission of policy rates to retail deposit rates gained momentum in the second half of FY23 as banks intensified their efforts to garner retail deposits to fund robust domestic credit growth,” the report said.

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