US banking collapse not a cause of worry for India

The failures of  Signature Bank and Silicon Valley Bank in the U.S may have a minor impact on the Indian economy as the Indian banking system has no direct exposure of sub-prime mortgage assets or failed institutions. A report by Tehelka Bureau

When US President Joe Biden declared that the US banking system was “safe” and vowed stiffer bank regulation, after U.S. regulators were forced to step in with a series of measures after Silicon Valley Bank and Signature Bank collapse, threatening to trigger a broader crisis, the message was clear that it was a desperate bid to boast about the stability and credibility of the American banking system.

 Experts say that the crisis is a glaring example of the limitless pursuit of greed and overindulgence at the expense of caution and due diligence. US banks reportedly flouted financial rules and a huge crisis was generated by overheating of the markets, excessive leveraging of debt, credit booms, miscalculation of risks, off-balance sheet operations by the banks. Not following the regulation, risk-prone monetary policy to mitigate taming inflation were the culprits. Biden has said, “Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.”  

Biden has stated that he is ‘firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight of larger banks so that we are not in this position again.’  “I’m going to ask the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure will happen again, and to protect American jobs as a small business,” he said.

Now it is for other countries like India to assess how it will impact them. Silicon Valley Bank was among the top 20 American commercial banks till last year. It is the largest bank to be shut down in the US since the 2008 financial crisis that crippled economy.

Impact on India

According to Moody’s Investor Service, the failures of Signature Bank and Silicon Valley Bank in the U.S. which were major lenders to the crypto sector, was likely to have a limited impact on India and Asia-Pacific because of structural factors. However, in an increasingly interdependent financial world, the global financial crisis may have a cascading effect on economies and finances across the nations. With the advent of globalisation and the Indian corporate sector’s access to external funding, it may be hit by the crisis.  

The crisis may have a minor impact on the Indian economy when compared to the US and other developed nations. The Indian banking system has no direct exposure of sub-prime mortgage assets or failed institutions. It has very limited off balance sheet exposure. India’s growth is driven predominantly by domestic consumption and investments. The Indian financial system might largely escape unhurt with the intervention of the Reserve Bank of India.  Banking system is safe and resilient, thanks to higher capitalisation and shrinking inter-bank linkages, but the only cause of worry is the non-performing assets (NPA).

Overall, the Indian banking and non-banking financial sectors have displayed resilience to several shocks, facilitated effective delivery of post-pandemic public policy measures to targeted sectors of the economy, and preserved financial soundness while supporting a broad-based recovery of the Indian economy.  The RBI in its report has observed that the current wave of technological innovations in the field of finance and new growth opportunities arising from global rebalancing of supply chains and domestic support to 14 industries under the production linked incentive (PLI) scheme opens new business avenues, it is important to be mindful of emerging risks from tech-led complex networks, alternative finance options and geopolitical developments.

The financial sector also needs to remain alert to risks and uncertainties associated with climate change. The regulatory and supervisory policies of the Reserve Bank will endeavour to promote a dynamic, robust, resilient, and competitive financial system, while preserving financial stability.  However, the key takeaway for India is that no one can afford to ignore the warning signals despite a robust regulatory system in place.