India’s banks are likely to remain unaffected by the fallout of the Credit Suisse crisis, which resulted in a fire sale of the Swiss banking giant to rival UBS. While it might be thought that this is due to Credit Suisse’s meager presence in the country, experts suggested that the domestic banking system remains insulated due to its inherent strength and tight regulation from the Reserve Bank of India.
RBI and the banking sector
The reason attributed to the strength of the Indian banking system is the heavy-handed, stern approach the chief regulatory body, the Reserve Bank of India, has taken. “Indian banks are currently in a far stronger position. There would be an impact on MTM losses, but given the RBI’s tighter regulation, most public sector and private sector banks are far more resilient than global banks. Moreover, frequent stress tests by RBI and tight monitoring sets Indian banks apart from other countries. Also, we are still a more traditional banking system compared to US and other European markets,” said Girish Bhise, founder and CEO, ValueAdd Research and Analytics.
“Whilst it seems that the RBI is very conservative, credit should be given to them on the robustness of the Indian banking system,” said Arihant Bardia, CIO and Founder, Valtrust. The Indian banking industry was lauded by market veterans, especially since it is buoyed by the RBI and RBI Guv Shaktikanta Das’ conservative tendencies. Sunil Damania, Chief Investment Officer, MarketsMojo, and Ajit Kabi, Banking Analyst, LKP Securities believed that the RBI has been highly proactive so far and its proactive risk management is likely to protect balance sheets under any adverse scenario.
RBI and LCR
Dnyanada Vaidya, Research Analyst, Axis Securities and Sunil Damania concurred that the Indian banking system remains relatively insulated. However, they argued that the already-negative sentiment might further sour in the near-term. If a similar crisis were to threaten domestic waters, Ajit Kabi said that the concept of Liquidity Coverage Ratio introduced by RBI is likely to handle liquidity pressure. “Public banks are more immune to liquidity risk as their LCR is higher as well as a low CDR (credit deposit ratio). The loan to assets ratio for Indian banks is around 36% against 65% for SVB. Additionally, the investment is more into government securities on SLR accounts,” he further said.
The issue stemmed from unrealized losses in the bond portfolios of mid-sized European and American banks, said Arihant Bardia. Peaking interest rates eroded the value of the bonds. The effects of higher borrowing costs may be less severe in India, as government bonds account for 80% of banks’ securities investments, said Akhilesh Jat, Category Manager – Equity Research, CapitalVia.
RBI and cryptocurrency
A certain part of the current global banking crisis, such as the fall of Signature Bank, has been heralded in by cryptocurrencies, which the RBI Governor Shaktikanta Das has been a vocal critic of. He said, ‘The crisis in America’s banking sector shows how big a threat private cryptocurrencies pose to the economy.’ “Das advised the Indian banking industry to “pay attention to the balance of their balance sheet” in order to prevent the asset-liability ratio from becoming out of balance,” stated Akhilesh Jat.
Outlook on banking sector
However, despite lauding the RBI’s prowess in mitigating possible contagions and crises, experts’ views on the outlook of the banking sector in India diverge. While some are incredibly bullish on the sector, others expect the banking sector to underperform going ahead. The banking sector is in a good shape, said Dnyanada Vaidya, adding, “We are positive about the sector. While credit growth and margins are likely to moderate marginally from current levels, they will continue to remain healthy. Asset quality concerns have eased, and incremental stress formation visibility remains low.
The Indian banking sector is adequately capitalised, said Suman Chowdhury, Director & Chief Analytical Officer, Acuité Ratings & Research. With increased credit growth and an expected pickup in private sector capex, the lending opportunities are set to increase. Given increased competition for deposits, however, the net margins may be under pressure, he added. On the other hand, Sunil Damania is bearish on the banking sector, stating that while Credit Suisse may not have an impact, the rising interest rates will harm banks’ NIM and increase NPA levels, affecting their quarterly earnings. As a result, he predicts the sector will underperform.