The Monthly Economic Review (MER) prepared by the Economic Affairs Department of the Indian Finance Ministry stated that the Indian banking system is less prone to incidents like the recent collapse of the US-based Silicon Valley Bank (SVB). The report noted that the multifaceted nature of the Reserve Bank of India’s (RBI) regulatory actions, improved bank balance sheets, and the attunement of the Indian banking system to frequent interest rate cycles will help support India’s financial stability and reduce the probability of an SVB-like event occurring in India.
The report further added that dynamic risk identification and management will be critical, especially in the current credit upcycle, as rising uncertainty leaves no space for complacency. The report cited the collapse of a few regional banks in the US and the takeover of the crisis-hit Credit Suisse Bank by the Union Bank of Switzerland (UBS) as events that have sent ripples across the global banking industry and posed fears of a contagion effect across economies.
However, the report highlighted that the Indian banking supervision is robust, with the RBI’s overarching coverage of institutions, regardless of asset size, in its bi-annual assessment of financial stability. Macro stress tests are also performed from time to time on individual banks, and investment in held-to-maturity (HTM) securities is limited to 23 per cent of deposits, reflecting an effective insulation of asset value from adverse market developments. Additionally, the rapid withdrawal of deposits is unlikely as 63 per cent of the deposits contributed by households are considered sticky. These factors make Indian banks different from those in the US and Europe that faced problems following the unwinding of tight monetary policy.