The collapse of Silicon Valley Bank has caused ripples across the financial world but is unlikely to affect Indian lenders. There are a few reasons why. Mint explains how stressed banks were managed in the past.
The collapse of Silicon Valley Bank has caused ripples across the financial world but is unlikely to affect Indian lenders. There are a few reasons why. Mint explains how stressed banks were managed in the past.
Has India faced bank failures in the past?
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Has India faced bank failures in the past?
India has also had its share of bank failures in the past, both pre- and post-Independence. In fact, the failure of Laxmi Bank and Palai Central Bank in 1960 prompted the government to introduce the Deposit Insurance Corporation (DIC) Bill in August 1961 to protect depositors. According to the Reserve Bank of India (RBI), when DIC started operations in the early 1960s, 287 banks were registered as insured. But in the next five years, this shrank to 100 as RBI pushed “reconstruction” and amalgamation of small and financially weak banks. In 1968, the Act was amended to widen its ambit to cover co-operative banks.
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What is the impact of SVB on Indian banks?
As of now, there seems to be limited impact on Indian banks as they have little exposure to Silicon Valley Bank. Experts said that given how tightly local banks are regulated, they are unlikely to face a similar fate in the foreseeable future. Macquarie Capital says Indian banks largely do not fund startups and hence any impact on the startup world should be manageable to a large extent. In December, RBI’s stress tests found that banks would be able to withstand severe stress. It found that even if customers withdraw 15% of uninsured deposits, liquid assets equivalent to 12.2% of total assets would be available.
Do local bank depositors have their deposits insured?
Deposit insurance started with a sum of ₹1,500, way back in 1962. This was gradually increased to ₹100,000 in 1993 and most recently, to ₹500,000 in 2020. In dollar terms (as of end-December 2021), this comes to 3.01 times India’s per capita income. In the US, the deposit cover is at $250,000 or 3.6 times that nation’s per capita income.
How has RBI handled recent cases of stress?
Recent examples include Yes Bank and Lakshmi Vilas Bank from 2020. These cases show how the regulator and the government acted in time to stitch together rescue plans. In the case of Yes Bank, private and public sector lenders were brought together to take stakes and bail out the bank. For Lakshmi Vilas Bank, RBI roped in foreign lender DBS Bank’s local arm for a merger. These banks were first put under a short moratorium to check for outflow of funds till the final plans were drawn up.
How are Indian banks expected to perform?
Although the brisk pace of credit growth is expected to slow down in FY24, banks are at their best shape in decades. Led by fewer bad loans, better recovery of legacy stressed assets and significantly high provisions as buffer, banks have been able to clean up their balance sheets. That said, the sector is not without its challenges, including the problem of convincing depositors—some of whom had left for higher returns in other investment avenues—to return to park their funds with banks.
