Despite Regional US Bank Failures, The Indian Banking Sector Has Remained Resilient
Global finance has been rocked by a recent wave of regional bank failures in the US, beginning with Silicon Valley Bank. According to research by credit rating firm Crisil, the impact on the Indian banking system is anticipated to be minimal.
A depositor run on Silicon Valley Bank, a significant lender to the technology startup industry, resulted in the closure of several institutions, including Signature Bank and First Republic Bank. It appears that the continual tightening of monetary policy was what caused the collapse.
Many financial institutions, including Signature Bank and First Republic Bank, were forced to close as a result of a depositor run on Silicon Valley Bank, a prominent lender to the technology startup sector. The fall appears to have been brought on by ongoing monetary policy tightening.
In its fight against above-tolerance inflation, the US Federal Reserve has increased its policy rate by 500 basis points over the previous 15 months, the quickest rate of increase since 1980. After a decade of historically low-interest rates, this sudden increase has already put a strain on US regional banks and the tech industry.
Due to decreasing crude oil prices, India’s primary external debt, the current account deficit, is anticipated to decrease this fiscal year. This could mitigate the effects of a global spillover on overall macros, according to Crisil, together with the Reserve Bank of India’s ample foreign reserves and India’s promising development prospects.
Over the past three years, there have been numerous significant bankruptcies in the Indian banking sector, notably Yes Bank. Lenders are now in a stronger position since the bad debt has decreased and capital has been raised since then. The central bank’s stress tests, which were published in December as part of the Financial Stability Report, demonstrated that Indian banks would be able to meet the minimum capital requirements even in unfavorable scenarios.
Banks must continuously maintain a minimum Capital to Risk-Weighted Assets Ratio of 9% following Reserve Bank of India regulations. According to the most recent RBI data published in December, the CRAR and Common Equity Tier 1 ratio of Indian banks were 16% and 13%, respectively, as of September’s end.
Since peaking at 10.8% in September 2018, the ratio of gross non-performing assets to total advances for Indian banks has been on a downward trend. From 5.9% in March 2022 to 5% in September 2022, it decreased. Since March 2021, the provision coverage ratio—which shows the amount of money set aside for bad loans—has been rising, reaching 71.5% as of September-end.
Despite concerns that the failure of regional US banks could spread to other economies, Crisil’s analysis indicates that the impact on the Indian banking sector is only anticipated to be minor. This fiscal year, India’s reliance on outside money is anticipated to decline, and the country’s financial industry is in better shape than it was three years ago. The Indian banking sector is well-capitalized, and stress tests have demonstrated that even in the worst-case situations, Indian banks would be able to meet the minimum capital requirements.
