Strong Regulations Protect Indian Banks
STORIES, ANALYSES, EXPERT VIEWS
The recent past, writes TCA Sharad Raghavan (Economy Editor at ThePrint) “has shown that every time Indian policymakers have exercised what looks like excessive caution, they have been rewarded. Conversely, each time they have pushed through something in a hurry, they have been burned.
“The latest example of the former is the resilience exhibited by our banking sector in light of the meltdown taking place in the US and Europe……”
India’s banking industry has earned a poor reputation due to the profligate lending that took place in 2009-13, and the subsequent high rates of non-performing assets, and the collapse of banks and NBFCs like Yes Bank and IL&FS.
“But the fact is that this mismanagement was on the lending side, where individual discretion played a much more important role than regulation (or the lack thereof) did. On the deposit side—which is where the US regional banks are currently facing their crises—India has robust regulations and standards.”
Basel III guidelines: The most important thing, states Raghavan “is that the RBI, early on, decided that the globally-agreed best practices on banking regulation—the Basel III guidelines—would apply to all Indian banks….This is not the case in the US. There, a significant lobby forced the government to relent and allow smaller banks to remain outside the remit of the Basel III norms. This is how the banks like Silicon Valley Bank, Signature Bank, and Silvergate Bank could operate with such imprudent practices…..
“India has done a great job in many areas of regulation because it has taken the time to think things through. The ongoing banking crises in the US and Europe should show the Indian government the value of this caution, and encourage it to abandon its haste.”
Government monitoring the global events
At another level, various wings of the government including the Prime Minister’s Office, the Finance Ministry and the Economic Advisory Council are monitoring the global events and assessing their impact on India, the latest being the UBS takeover off Credit Suisse facilitated by the Swiss government and its regulator.
According to policy experts working alongside the government, there is comfort in the prevailing macroeconomic situation, and the Finance Ministry was cognisant of the exogenous risks emanating from two key issues — the continuing Russian-Ukraine and the emerging stress in the financial sector on either side of the Atlantic.
The focus has been on macroeconomic stability.
Amid the ongoing US banking crisis, the Indian banking system continues to remain resilient and stable, Reserve Bank of India Governor Shaktikanta Das said last week. ‘We have been engaging with the banks over the last several years and I am happy to report that the way the Indian banking system has evolved and the way it is positioned today, the Indian banking system continues to be resilient and stable,’ Das said
He, however, cautioned lenders against build-up of any asset-liability mismanagement and asked them to keep conducting internal stress tests to ensure proper risk assessment.
RBI and the government have worked in unison
Soumya Kanti Ghosh (Group Chief Economic Advisor, State Bank of India) emphasises “that the Reserve Bank of India and the government have worked in unison ever since the pandemic began to steer the economy. The playbook adopted by the RBI in times of crises, deployed at a systemic level and led by large and systemically important banks, has been the best-integrated policy response both in 2008 and 2020…..
“It would seem that both central banks and governments around the world can learn a trick or two from India in terms of coordinating monetary and fiscal policy responses during the pandemic…..”
Indian banks, concedes Ghosh “are also in sound financial health. Moreover, when compared to other major countries, India has the least foreign claims, both on counterparty basis, and on a guarantor basis. Additionally, our ratio of foreign claims to domestic claims is also the least among countries signalling that our banking and financial system is very disciplined, and that no fear that an international balance sheet contagion can originate from here.”