How safe are Indian Banks after the US based SVB collapse?

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In the aftermath of the collapse of US based SVB (Silcon Valley Bank), many investors are questioning whether such a scenario is likely to happen to any Indian Bank. Such fears arise from the fact that fifteen years ago, the collapse of Lehman Brothers in the US triggered a reaction in the Indian markets and stocks of many banks saw a sell off during the same period. 

The reasons why Lehman Brothers collapsed and consequently Indian banks bore the brunt was the same – indiscriminate lending and inability to recover debts. Indian banking system, particularly the state owned banks better known as PSU banks were notorious for their indiscriminate lending patterns at that point of time. That has changed since 2015 when the government mandated the PSU banks to bring down their NPAs (Non-Performing Assets). The result of this exercise bore fruits in 2022, where the NPAs of these banks were at their lowest. The stock returns of the PSU bank were the highest among all sectors in 2022 with the PSU bank index delivering a whopping 70% returns in 2022.

Coming back to SVB, America’s 16th-largest bank, it failed after depositors hurried to withdraw money this week amid anxiety over the bank’s health. It was the second biggest bank failure in US history after the collapse of Washington Mutual in 2008. The bank served mostly technology workers and venture capital-backed companies. SVB has been shut down by regulators and its assets have been seized, the Federal Deposit Insurance Corporation (FDIC) on March 10th. The closure order was issued by the California Department of Financial Protection and Innovation, which also named the FDIC as the receiver.

In case of SVB, it was not bad lending practices, but bad risk management. Flush with cash from high growth startups, SVB bought huge amounts of bonds more than a year ago. Like other banks, Silicon Valley Bank kept a small amount of the deposits on hand and invested the rest in the hopes of earning substantial returns. That had worked well until the Federal Reserve began raising interest rates last year to cool inflation. At the same time, startup funding started to dry up, putting pressure on many of the bank’s clients, who then began to withdraw their money. To pay those requests, Silicon Valley Bank was forced to sell off some of its investments at a time when their value had declined. When this came to light, the bank had already lost nearly $2 billion.

In the Indian context, the Reserve Bank of India (RBI) has learnt its lessons from the recent bank failures (Yes Bank and DHFL) and has put measures in place that have made sure financial stability is not at risk for the Indian banking system. The robust framework defined by the RBI makes sure that banks spread their risk and an similar event occurring, has very low probability among Indian banks.

Quoting Rajnish Kumar the former chairman of the largest PSU bank SBI, on this development, he said “There will be no major impact on the Indian banking system,”

Another senior banker Madan Sabnavis, Chief Economist, Bank of Baroda said that “It is unlikely to impact our banks as they are large and don’t have such exposures. The issue here is deposits that came from startups and to make up for the shortfall, it sold securities which have diminished in value. We don’t have such a situation. SVB is too small a bank to have ripple effects even on the US banking system. The regulator has already stepped in,” 

From a fundamental perspective, Indian banks are completely insulated from SVB and margins of Indian banks have improved in recent quarterly results. However, analysts maintain that margins of banks have improved due to high interest rate regime. A high interest rate regime works in favour of banks for short term. If the interest rate regime lasts for long, then it affects business of banks due to high lending rates and US-based banks are facing the same issue these days.

On the other hand, Indian banks are improving on key metrics and are likely to remain stable in future. Bad loans of Indian banks are expected to decline 90 basis points to less than five per cent in FY23 and hit a decadal low of sub-four per cent by March 31, 2024, said an Assocham-Crisil Rating study. The study attributed the decline in gross Non-Performing Assets (NPAs) to the post-Covid economic recovery and higher credit growth.

The report further adds that significant clean-up of books by banks in recent years, as well as strengthened risk management and underwriting, has led to higher preference for borrowers with better credit profiles. The steady improvement in corporate asset quality is clearly manifested in key indicators such as the credit quality of bank exposures.

On a lighter note, the news of the SVB collapse had an unlikely victim in India. A relatively small Mumbai-based cooperative bank, which shares some similarity in the brand name (SVC Bank) with that of the failed US bank, is now flooded with enquiries from panicked customers about the safety of their deposits. This forced the bank to send a message to its depositors that read “We are SVC Bank, erstwhile Shamrao Vithal Cooperative Bank, one of the leading & strongest cooperative banks in India with a legacy of 116 years. We have no relation to Silicon Valley Bank.”

Thanks to the robust framework of the RBI and the improving metrics of Indian banks, the SVC episode is not likely to have any significant impact on the Indian banking system.

 

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255 )

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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