Resilience of Indian Banks

Apr 21

Amid turmoil in the US and European banking sectors triggered by bank collapses, it was feared that India would also become part of the chain reaction, but India weathered the global crisis.

But why and how? There are solid reasons behind the stability and resilience of Indian banking system. Six of them can be enumerated as under:

1. Foreign Claims
Firstly, compared to other major countries such as the US and the UK, foreign claims (sum of cross-border claims) on India are the lowest, both on the counterparty basis and on the guarantor basis.

The US has the highest foreign claims with $4345 billion on the counterparty basis and $4296 billion on the guarantor basis. The UK is the second most foreign exposed country with foreign claims of $4039 billion on the counterparty basis and $4032 billion on the guarantor basis. India has the lowest foreign claims of $104 billion and $81 billion respectively, thus limiting exposure to global uncertainties.

2. Capital Level
Reserve Bank of India (RBI) has stipulated that banks in India are required to maintain a minimum Capital to Risk Weighted Assets (CRAR) of 9% against the Basel norms of 8%. Stress tests conducted by the RBI shows that Indian banks would be able to comply with minimum capital requirements even under adverse scenarios.

3. Asset Quality
Gross non-performing assets (GNPAs) to total advances ratio of Indian banks have declined after reaching a high of 10.8% in September 2018. In March 2022 it fell to 5%. The Provision Coverage Ratio (PCR) also increased to 71.5. % in September, 2022.

4. Bond Portfolio
One of the qualms faced by US banks was a sharp hike in interest rates by 450 basis points (bps) since March, 2022. This led to mark-to-market (MTM) losses on their bond portfolios, as the benchmark 10-year bond yield rose 150 bps.

This was not the case with India, where the policy repo rate has been raised by 250 basis points only since May 2022, and the benchmark 10-year yield rose by only 20 bps. Only this month, the RBI decided to keep the repo rate unchanged at 6.50% despite the hikes continued by the US and the UK.

5. Liquidity
Indian banks have a high ratio of low or no cost CASA (current account savings account) deposits of retail nature that lends further resilience to banks. Credit-to-deposit (CD) ratio is also comfortable at 75%.

6. Deposit Insurance
The insurance cover for depositors is capped at Rs 500,000 per account which fully insures 98% of deposit accounts, as against 35 to 70% in the US.

While nothing can be said with absolute certainty as to what will happen tomorrow, given the current geopolitical scenario, the above measures taken by the banks, regulator and government ensure the stability and resilience of banks in India.

It is said that good things happen slowly, while bad things happen fast. Appropriate precautionary measures can ensure that good does not turn into bad.