Banking Central: Why an SVB-like crisis is unlikely in India

Before the US regulators stepped in Sunday to backstop all SVB deposits, many startups were at the brink of closure. (Source: Reuters)

Over the weekend, the financial world was rocked by three back-to-back bank failures in the US. After the closure of the Silicon Valley Bank (SVB) and Silvergate Capital Corp., regulators shut down New York-based Signature Bank on Sunday. Of the three, the biggest is SVB.

Why did SVB fail? The simple answer is a major asset-liability mismatch. As the deposit influx grew sharply, the bank didn’t have enough credit demand to deploy the money. To mention some numbers, its deposits grew from $61.76 billion at the end of 2019 to $189.20 billion at the end of 2021. The bank purchased a large amount (over $80 billion) in mortgage-backed securities (MBS) with these deposits for its Hold-To-Maturity (HTM) portfolio.

Now, almost 97 percent of these MBS were over 10 years in duration, with a weighted average yield of 1.56 percent. But following sharp rate hikes by the US Federal Reserve, the value of these investments in longer-duration bonds fell sharply. The bank announced last week that it had to raise $2.25 billion through a share sale to shore up its finances.

The move logically panicked depositors who went on a large-scale cash withdrawal spree, which led to a crash in share prices and ultimately the failure of the bank.

With the Fed assuring that all depositors will get their money back, a contagion has been hopefully averted.

What does it mean for India?

Now, what does this crisis have to do with India? As Moneycontrol reported on March 11, experts are fairly certain that there will be no major impact on India from the SVB crisis. Indian banks don’t have any material exposure to the failed US banks.

Also read: HSBC acquires Silicon Valley Bank's UK unit for £1

Will an SVB-like event happen in Indian banks? Very unlikely. That’s because the banking regulator, the Reserve Bank of India (RBI), will not simply let banks park such a significant amount of money in such securities or banks have vulnerable balance sheets.

As per RBI rules, banks have to mandatorily park 18 percent of their deposits in statutory liquidity ratio  (SLR) bonds and another 4.5 percent in the cash reserve ratio (CRR). Indian banks now have much healthier balance sheets compared to a few years ago.

Also read: Why the Fed had to step in to save Silicon Valley Bank

Capital and asset quality much better

According to the RBI Financial Stability Report (FSR) released in December, stress test results indicate that banks would be able to withstand even severe stress conditions should they materialise. Macro stress tests for credit risk reveal that Scheduled Commercial Banks (SCBs) would be able to comply with the minimum capital requirements even under severe stress scenarios. The system-level Capital to Risk-Weighted Assets Ratio (CRAR) in September 2023, under baseline, medium and severe stress scenarios, is projected at 14.9 percent, 14.0 percent and 13.1 percent, respectively.

Under the Basel norms, banks need to have a minimum of 9 percent capital adequacy and 11.5 percent including the Capital Conservation Buffer (CCB).

On the bad loan front, too, things are looking much better at this point. The Gross Non-Performing Asset (GNPA) ratio of SCBs fell to a seven-year low of 5 percent in September 2022 while Net Non-Performing Assets (NNPAs) dropped to a 10-year low of 1.3 percent, the FSR report said.

The RBI had put in place a stronger surveillance framework for the banking sector’s health, taking lessons from the 2008 global financial meltdown and later began a massive clean-up of the bad assets through an Asset Quality Review (AQR) programme started in 2015.

To cut a long story short, the Indian banking system, both in terms of capital and asset quality, is in a much safer spot right now, which implies that a big, SVB-like crisis is unlikely here. At least, that's the hope.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)