| Photo Credit: Altaf Hussain

It has been a routine activity for the Reserve Bank of India to identify certain banks as domestic systemically important banks (D-SIBs). Last week, on Thursday, the central bank published the list for FY25. The usual three — State Bank of India among public sector banks and HDFC Bank and ICICI Bank among private banks — found mention in the list.

Colloquially, such banks are reckoned as ‘too big to fail’ and certainly so because they represent over 50 per cent of the country’s total banking system. Banks classified so are required to hold addition common equity Tier-1 capital as a percentage of risk weighted assets so that they have the capital cushion to handle any crisis. In 2010, post the global financial crisis, the Financial Stability Board of the Basel Committee on Banking Supervision recommended that all member countries should have a framework to reduce risks attributable to Systemically Important Financial Institutions, and in the process identify and establish a regulatory framework to deal with D-SIBs. India adopted this concept in 2014, along with its global peers, and in 2015, named SBI and ICICI Bank as D-SIBs. A year later, HDFC Bank was added to the list.

While this classification is at one end, it’s equally important to acknowledge that the RBI has always handled any bank failure with such vigour that these events have barely dented the overall stability and balance of the country’s banking system. Whether it was the massive failure of Global Trust Bank two decades ago, or the more recent YES Bank crisis that could have severely jolted the country’s financial stability and image in the global arena, the central bank was quick to cautiously execute a rescue mechanism.

In short, for the RBI, irrespective of the size, every bank is reckoned as ‘too big to fail’, and this is the approach adopted every time the country faced a crisis.

In fact, including the largest urban cooperative bank, India has seen three bank failures in a span of two years (2019 and 2020). What’s extremely appreciable is that unlike the past instances, where failed banks were handed out to large PSU and private banks to rescue them, the RBI devised newer solutions to handle each crisis. Whether it was a consortium of financial institutions led by SBI, which bailed out YES Bank, or Lakshmi Vilas Bank’s buyout by DBS Bank India or Unity Small Finance Bank created to rescue PMC Bank, each of these are out-of-text book solutions devised by the RBI to ensure that no bank, big or small, is left to fail.  

In a country where depositors’ money forms the bedrock for the banking system, truly the regulator cannot afford any bank to fail, irrespective of its positioning or scale in the system. Therefore, while the three banks – SBI, HDFC Bank and ICICI Bank are classified as D-SIBs — in reality, every bank is systemically important.  The nomenclature of D-SIB is important from a global compliance perspective, but in practice almost every bank has been treated as too big to fail.