How resilient are Indian lenders amid a global banking turmoil?

PM Narendra Modi and RBI Governor Shaktikanta Das have both said that local lenders are strong, after the US banking crisis spilt over to the Indian stock market

Turbulence in the United States and the European banking sectors have prompted Indian policymakers to assure investors that domestic financial institutions are resilient.

Prime Minister Narendra Modi and RBI Governor Shaktikanta Das have both said that local lenders are strong, after the US banking crisis spilt over to the Indian stock market and rattled bank stocks.

The Nifty Bank index is down 5.3 per cent since the crisis at Silicon Valley Bank (SVB) erupted earlier this month, compared with a near-18 per cent fall in the US banking index.

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However, analysts say that unlike in the past few years, when Indian banks had large bad loans and limited capital, these lenders are now in a better position to withstand stress.

"Right now, Indian banks are showing resilience compared to their US counterparts and that largely has to do with their current capital levels, healthy asset quality and strict monitoring by the regulator," said Anil Gupta, senior vice president and co-group head for financial sector ratings at ICRA ratings agency. He does not foresee a direct impact of the global banking turmoil on Indian banks.

How well-capitalised are Indian banks?

The Indian financial sector has seen large insolvencies, including Yes Bank, over the past three years but lenders have reduced bad debt and raised capital since then, putting them in a stronger position.

Stress tests conducted by the central bank and released as part of the Financial Stability Report (FSR) in December showed that Indian banks would be able to comply with the minimum capital requirements even under adverse scenarios.

According to Reserve Bank of India (RBI) norms, banks are required to maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 9 per cent on an ongoing basis.

As per the latest RBI data released in December, the CRAR and Common Equity Tier 1 (CET1) ratio of Indian banks stood at 16 per cent and 13 per cent, respectively, as of September-end.

What is the asset quality position of banks?

The gross non-performing assets to total advances ratio for Indian banks has been on a declining trend since hitting a high of 10.8 per cent in September 2018. It fell from 5.9 per cent in March 2022 to 5 per cent in September 2022.

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The provision coverage ratio (PCR), which reflects the percentage of funds set aside for bad loans, has also been increasing since March 2021 to 71.5 per cent as on September-end.

How are banks' bond portfolios performing?

One of the pressures faced by US banks is the sharp rise in interest rates, leading to mark-to-market losses on their bond portfolios.

Indian banks are not facing the same level of pressure on their bond portfolios as US banks because Indian interest rates have risen less.

While the Federal Reserve has raised interest rates by 450 basis points since March last year, India's Monetary Policy Committee (MPC) has increased the policy repo rate by 250 bps since May.

India's benchmark 10-year bond yield has risen 20 basis points since the rate hiking cycle began in May 2022, while the comparable US 10-year yield has risen 150 bps since the Federal Reserve started hiking rates.

If Indian banks mark their held-to-maturity (HTM) investments to market, it would bring down their CET-1 capital by 12-25 per cent, estimates Moody's Investors Service. "That said, banks are unlikely to realize such losses because their funding and liquidity are strong enough to allow them to hold onto their HTM securities," Moody's said in a report

How comfortable are banks on liquidity?

Indian banks have a high proportion of low-cost current account savings account (CASA) deposits and a high proportion of retail deposits, making them more resilient, said Aditya Acharekar, associate director at CareEdge Ratings.

While deposit growth has trailed credit growth in recent times, the credit-to-deposit (CD) ratio remains comfortable at 75.3 per cent.

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This means that the banking system has sufficient stable funding.

Indian banks are also comfortable on liquidity, with the coverage ratio at 135.6 per cent as of September-end, the latest central bank data showed, well above the regulatory requirement of 100 per cent.

Higher deposit insurance

After two large bank failures in the last three years, India has raised the limit of insurance cover for depositors in insured banks from the earlier level of Rs 100,000 ($1,211.23) to Rs 500,000 per account.

This was done with a view to providing a greater measure of protection to depositors in banks.

While the amount seems small, it fully insures 98 per cent of deposit accounts, according to a State Bank of India (SBI) research note. By contrast, deposits of the top 10 banks in the US were insured in the range of 38.4 per cent to 66 per cent, SBI said.