Indian banks insulated from global spillovers
If recent developments are any indication, a global banking crisis seems to be hurtling earthwards. Three US-based banks, namely Silvergate, Silicon Valley Bank, and Signature Bank, folded in quick succession, while another lender, First Republic, got an urgent $30 billion whip round from fellow banks to stay afloat. The situation appears similar elsewhere, too, with the systemically important Credit Suisse gasping for breath. Market anxiety can be seen and felt with volatility stretching across geographies, making one thing abundantly clear—that the banking and financial sector is in for a perfect long storm. However, the anticipated rout may not end up as global financial crisis 2.0. Policymakers, financial regulators and central banks are back to the ‘whatever it takes’ mode for the third year now. If 2021 was all about providing liquidity, 2022 saw a fierce battle against inflation and in 2023, they are doing all they can to prevent widespread bank runs and financial contagion.
But 2023 is different from 2008, at least on two counts. If the 2008 crisis was due to credit crunch and asset quality issues, the current crisis is largely due to interest rate risk—a first in a decade. Two, they also differ on scale. While the 2008 episode saw 25 bank failures with $373 billion in combined assets, in 2023 (so far), just two banks had $319 billion in combined assets, according to government data sourced by a US-based analyst. Much of the carnage was due to the steep tightening of policy rates forcing banks to raise deposit rates even as their investment yields began plummeting. So, to avoid a full-scale crisis, the US regulators allowed regulatory relaxations so that banks could payout even uninsured depositors if they folded up. And given the intensifying financial stability risks, markets believe the Fed may well pause rate hikes to stem the panic.
Indian banks are sound, well protected, and shielded from global spillovers, thanks to the RBI’s regulations, including statutory liquidity ratios, capital buffers, and cash adequacy requirements uniformly applicable for all banks and NBFCs. Moreover, household deposits dominate Indian bank funding, unlike the US peers who rely on wholesale channels, which can snap lifelines owing to macroeconomic vulnerabilities. That said, India’s growth recovery process is unique, and as economist Surjit Bhalla recently noted, RBI must follow its own course than simply following the Fed.