On 25 March, Finance Minister Nirmala Sitharaman asked the chiefs of state-run banks to be more vigilant in the wake of a banking crisis in the US and Europe. The call to strictly monitor top corporate loan accounts and regularly undertake stress tests was to put the banks on high alert. But there are very few who believe that Indian banks will develop ill-health to the point of facing death, like the way Silicon Valley Bank (SVB) or Credit Suisse did.

There are stress points that have surfaced post Covid and the retail and MSME segments could see a rise in banks’ bad loans. But senior bankers feel the demise of SVB and Credit Suisse will not have knock-on effects in India as the banking sector is highly regulated to prevent lenders from taking risky bets.

The collapse of SVB and Credit Suisse may have impacted the market sentiment but Indian banks are run a lot more differently. The Reserve Bank of India (RBI) has a hawk-like watch and banks in India rather suffer from over-regulation, bankers said.

Credit Suisse, according to bankers, was a catastrophe in the making as it was marred by scandals and a lackadaisical attitude towards risk. The problem with SVB was that of pure oversight on the duration risk with the bank pouring a major chunk of the money into long-term US treasury bonds in a low interest-rate regime. Trouble started when interest rates moved up and the depositors, uninsured and undiversified, rushed to withdraw their cash. 

“In the case of the $212 billion tech-lender, it was utter bad risk management. The exposure to the US government bonds was significantly high,” said an analyst who tracks the banking sector.

The overexposure issues are stifled in India due to tighter regulations. The RBI has prescribed strict regulations on loan exposure limit of banks to a single corporate entity, priority sector lending, statutory liquidity ratio (SLR) and cash reserve ratio (CRR). 

“The current case in the US is because SVB had taken a disproportionately large position in longer tenor bonds. That situation will not arise in India as the norms are too tight and too stiff. No bank can take such long positions of such quantum,” said the chief executive officer of a private bank.

The maximum bond investments in an Indian bank are just 25% to 30% of the book, according to analysts. Lending continues to be a key activity for all the banks in India.  

“Though there are no restrictions for banks to invest into long-term securities, our bond market is not so developed and is dominated by government bonds. There is a restriction on the quantum parked in the held-to-maturity category where banks do not have to book mark-to-market gains or losses. Banks can park only 23% of bond holdings in this category, which is again being brought down gradually,” said Anil Gupta, senior vice president and company group head for financial sector ratings at ICRA.

Like their foreign peers, Indian banks were hit when the central bank started hiking interest rates since May 2022 to fight against rising inflation. With the RBI successively raising the repo rate by 275 basis points to 6.50%, some banks have had to book mark-to-market (MTM) losses. They are, however, far from any danger of being blown away due to this.

“Even the  Rs 13,000-crore MTM losses reported in the current fiscal’s first quarter ended June is now wiped out because the yields did not rise as much and the profits of the banks grew. Depositors rarely flee from a bank unless a fraud has surfaced. Even when some of the public sector banks were under the RBI-prescribed prompt corrective action (PCA) framework, there was no run on their deposits. The SVB kind of situation has remote chances of occurring here," Gupta said.

The other risk banks run is the overexposure of debt to certain companies. But in India the collapse of a bank can happen only in case of a fraud as the RBI has set a red line on the loan exposure to a single group entity.  

“The larger banks have larger company exposures, but compared to their balance sheet size it is minuscule. Both the regulatory prescription on exposure limits and also the internal bank risk mitigation processes keep a check on this,” said the chief of a public sector bank.

Bankers do not agree that a rise in interest rates would lead to a surge in bad loans as companies face a new set of problems. “In India, loans to the corporates are mainly given on the basis of cash flows. When interest rates increase, the impact could be on home loans as they are floating-rate products. In such cases, usually the EMI (equated monthly instalment) remains the same while the loan tenure gets extended. But the other loans are usually fixed-rate products,” said the CEO of a private bank who was quoted earlier. 

Banks in India do not have an option to lobby with the regulator for relaxations in regulations. But in the US, SVB along with 300 other smaller banks lobbied for lighter regulations. The duration risk was ignored and SVB invested a substantial part of its deposits in long-term bonds. 

“In India, banks have to keep aside a substantial part of the deposits as SLR and CRR. The banking system is thus hedged to a large extent,” said the CEO of a South-based bank.

While poor risk management led to the failure of both SVB and Credit Suisse, in India the banking system is extremely regulated and trouble has come in a few cases only when fraudulent lending has happened. 

“Over the last 75 years since independence, the failure rate for banks in India has been abysmally low. Even in the case of Yes Bank and PMC Bank, there has been specific fraud charges while Lakshmi Vilas Bank had shareholder issues. Normal business-related failure of banks has been practically non-existent in India,” said the CEO of a bank.

Will money move around to bigger banks and smaller lenders be impacted in a higher interest-rate regime? “Unlikely,” said the CEO of the private bank quoted earlier. “Banks with good image will continue to get deposits. Even during the Covid days which was an extreme once-in-a-century crisis, small banks like Karnataka Bank, Karur Vysya Bank or Dhanlaxmi Bank or the 10-12 SFBs (small finance banks) fared well, when seen in hindsight.”