The recent turmoil in Silicon Valley banks has caused concern among investors and financial experts worldwide. The collapse of several such banks has raised doubts about the sustainability and reliability of modern banking systems. However, India’s banking sector remains comparatively unaffected by the crisis, despite its financial interdependence with the global market. Here are seven reasons why Indian banks will not be affected by the current Silicon Valley bank turmoil:
1. Robust Regulatory Framework: India has a strong regulatory framework in place, which ensures that the country’s banking sector is well-protected against any systemic risks. The RBI has been vigilant regarding global market trends and has implemented prudent measures to safeguard banks from potential risks. The RBI has regularly conducted stress tests on banks to assess their resilience under adverse scenarios. Moreover, it has a comprehensive supervisory mechanism that closely monitors banks to ensure compliance with regulations.
2. Diversified Assets: Indian banks have diversified their assets, reducing reliance on a single industry or segment. This strategy has enabled Indian banks to mitigate risks arising from global shocks. Unlike Silicon Valley banks that had exposure to a single market segment, the technology sector, Indian banks have a diversified loan portfolio covering various sectors such as agriculture, infrastructure, and retail. Thus, even if one sector gets affected, other sectors can still generate sufficient revenue and profits to keep the banks afloat.
3. Strong Capital Base: Indian banks have a strong capital base, which provides them with the resources to manage any unexpected losses. The RBI has set stringent capital adequacy norms that require banks to maintain minimum capital ratios, thereby ensuring a sound financial base. Additionally, many Indian banks have successfully raised capital through various means such as rights issues, follow-on offers, and Qualified Institutional Placement (QIP). This has strengthened their balance sheets and made them better equipped to face the potential risks that may arise.
4. Lending Standards: Indian banks follow strict lending standards, which have helped them maintain healthy asset quality. Banks have been advised to conduct due diligence before lending, thereby reducing the chances of granting loans to defaulters. The RBI has also introduced strict guidelines for determining borrower eligibility, including a creditworthiness assessment, debt-to-income ratio, and debt-to-asset ratio. This has ensured that banks lend only to deserving borrowers and reduced the chances of defaults.
5. Robust Savings Culture: India has a robust savings culture, with individuals opting for fixed deposits and other long-term saving schemes. This trend has helped Indian banks maintain a stable deposit base, which has supported their lending activities. This, in turn, has provided a steady flow of income for banks, making them resistant to the vagaries of global markets.
6. Low Global Exposure: Indian banks have low global exposure compared to their peers in other countries. This has protected them from the ripple effects of the international financial crisis. Indian banks have largely focused on the domestic market, lending to retail and corporate clients within the country. Consequently, they are not vulnerable to global factors such as currency fluctuations, interest rate variations, or geopolitical risks. This is a significant advantage for Indian banks and makes them more resilient to the current turmoil.
7. A Growing Domestic Market: India’s domestic market is rapidly expanding, generating opportunities for banks to tap into new segments. The government’s pro-business policies, coupled with the increase in disposable incomes, have created a fertile ground for banks to grow their business. India’s growing middle class and increasing urbanization have also opened up new avenues for banks to offer their services. Furthermore, India’s digital push has enabled banks to leverage technology to provide innovative financial products and services to customers. All these factors collectively support the growth of the banking sector in India, making it less exposed to the current Silicon Valley bank turmoil.
Finally, Indian banks are relatively protected from the current Silicon Valley bank turmoil for several reasons, including a strong savings culture have, all contributed to the resilience of Indian banks. Indian banks have a vast deposit base, which gives them the ability to absorb sudden deposit withdrawals without significant repercussions. The top six banks alone account for over 60% of the deposit base in the Indian banking system. The Indian banking system’s scale and diversity grant it an inherent edge that would successfully avert a scenario like Silicon Valley. These factors have enabled banks to manage any potential risks and safeguard against any global macroeconomic shocks. Nonetheless, regardless of these advantages, it is still essential to remain vigilant and continue implementing prudent measures to ensure that the banking sector remains strong and capable of supporting India’s economic growth.
Dr Ranjeet Mehta is Deputy Secretary General, PHDCCI. Views expressed are personal.