Shocks being Felt Across The Global Banking Sector, India Remains Insulated

It all began with the Silicon Valley Bank which collapsed last week and a slew of other banks either ran into similar trouble or had to be bailed out. Silicon Valley Bank was followed by Signature Bank, where regulators closed New York-based Bank, which was the third largest failure in the U.S. banking history, and two days after authorities shut Silicon Valley Bank.

Next in line was Credit Suisse, which faced tremors. Credit Suisse which faced liquidity crunch had to borrow as much as $54 Billion From Swiss Central Bank. For First Republic Bank, eleven of the biggest banks in the United States announced a USD 30 billion rescue package to prevent the California-based bank from becoming the third bank to fail in less than a week. First Republic serves a similar clientele as Silicon Valley Bank.

In all this there was no instance of fraud or mismanagement and in some cases it was merely a run on the deposits. Silicon Valley Bank for example, ran into trouble as investors began withdrawing money. This led to a run on the bank as several large venture-capital firms advised their clients to withdraw funds. Obviously, when there is a sudden large run on deposits, there maybe no place to hide.

Stock markets across the globe collapsed only for the Dow to recover on Thursday, after reports that eleven of the biggest banks in the United States announced a USD 30 billion rescue package for First Republic Bank.

As we write, the markets have stabilized after intervention of these 30 large banks. Dow Jones rallied more than 300 points and Asian markets are up on Friday.

India remains resilient

In India, given the Reserve Bank of India's stringent norms, banks have remained rock solid despite a rising interest rate regime. The cash reserve ratio of 4.5% as an example, is pretty adequate. To hold 4.5% of your total deposits in liquid instruments is ideal, unless there is a huge run on deposits. Even small finance banks have not encountered any issues so far, though their capital adequacy norms remain rather stringent.

The last we heard was the case of Yes Bank, which eventually saw capital infusion by SBI. The government was clever enough to ask SBI's intervention and the very name SBI prevented a collapse of Yes Bank. In the past there have been cases of cooperative banks being vulnerable, however, there has been no large commercial banks in India which have collapsed. We have had instances like the Global Trust Bank episode, which eventually gets taken over by a larger bank. So, India as always has weathered the storm and risks seems non-existent.