We often perceive safety or quality by the colour of the skin. It is common knowledge where the global financial crisis of 2008 originated and then put the entire world in jeopardy. It was a US financial crisis, which goes with the nomenclature of the global financial crisis. The fact that in 2008 or the aftermath not a single Indian bank was in trouble due to the global issues, bears testimony to our structural and regulatory quality.
Today, there are issues with certain US banks and one large Swiss bank; parallels are being drawn to 2008 and question marks are being raised about our banks. Let’s first understand the issue that happened in a few US banks.
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There are good quality securities held in the portfolio of banks. In our case it is Government of India bonds, in their case it is US Treasury securities. These securities are largely in the held-to-maturity (HTM) category, which means, these securities are not marked-to-market (MTM). This, in turn, means that if the market price of these securities are less than purchase price, it is not reflected in the profit-and-loss account.
In the case of a few US banks, due to certain reasons, there was a run on the bank and they were forced to sell securities in the market. Since the US Fed has raised interest rates steeply, by 4.75% so far, and is reducing the size of the US Fed balance sheet, there are unrealised losses. In these banks, one thing led to the other and ultimately the authorities had to step in with a backstop, i.e., support system.
Deposit insurance
In our case, the bond yield movements in the secondary market are relatively less volatile than in the US. If there is a run in a RBI-scheduled bank, RBI supports with cash to meet withdrawals. This is in exchange for maintenance of Cash Reserve Ratio of 4.5%. Usually, given the stability of the overall financial system, we do not see run on our banks. Deposits in all our banks are insured to the extent of Rs 5 lakh and are safe to that extent.
However, it is not only about Rs 5 lakh being safe. In case of PSU banks, the majority ownership of the Central government (more than 50%) implies a moral responsibility. It is not a stated guarantee, but we have seen instances of support earlier. When the NPAs were being written off 2017 onwards and capital of PSU banks were being eroded, the government stepped in with chunks of fresh capital. In the case of the leading private sector banks, it is the good fundamental quality of these banks, plus the supervisory capability of the RBI.
Post the issue with a few US Banks, Jefferies —a global financial major —conducted a stress test on Indian banks. The outcome of the stress test was that banks are well-placed in terms of quality of deposits and potential impact on MTM on the HTM portfolio.
Issues with banks
This is not to say issues never happen with banks in India. But to put in perspective, the issues that have happened in the past, and the cases pending in courts of law, are in the cooperative sector. In a PSU bank or a leading private sector bank, depositors have not lost their money; and we are talking beyond the DICGC coverage of Rs 5 lakh per depositor per bank. When we say the banking system here is strong, it refers to the crux of the system and we can exclude cooperative banks from the ambit. As a consumer of the system, you have to make your decision accordingly, and choose which bank you want to bank with.
From a macro perspective as well, in the US the situation is better than that in 2008 and there is no case for a contagion, at least till this point of time. Unlike in 2008, there is no large-scale leverage by financial institutions, there are no sub-standard loans (NINJA loans) foisted off as AAA, there is no housing sector bubble, and the authorities have stepped in with a backstop. In the case of the Swiss bank as well, their regulators are on the job.
For your investments, market price fluctuations is a routine affair, but our structure is robust.
The writer is a corporate trainer and an author
