US Bank Crisis: Meltdown of SVB, Signature Bank won't affect Indian banks, says Motilal Oswal Group chairman Raamdeo Agrawal

It is well-known that a small fluctuation in the US economy impacts the global economy in several ways.

Even as the US economy faces headwinds and the administration there tries to bring things back on track, it has felt the jitters after the meltdown of two lesser-known banks.

Silicon Valley Bank (SVB), an unknown entity until a few days ago, shot into global attention as it shut its doors.

The global markets, including the Asian ones, slipped after the news broke.

Even as the markets across the globe were struggling to recover from the aftershocks, news came of the failure of another US bank, Signature Bank.

The after-effects of the crisis brought back memories of the 2008 Recession, when a "too big to fail" bank such as Lehman Brothers collapsed.
 
Can the current crisis lead to recession-like scenario of 2008? Anil Singhvi, Managing Editor of Zee Business, spoke to Raamdeo Agrawal, chairman of Motilal Oswal Group, who has seen and countered several such meltdowns.

He shared his experience as to why Indian investors should not panic and how they can tackle the current crisis.

Agrawal says that the experience of SVB and Signature Bank is unique, because the banks haven't shut down because of bad loans.

"Our thinking is that the banks collapse because of bad loans. But here, the scenario is different, as these banks have shut down because of bad deposits.

"It's like you have deposits in your bank, and you have given loans to genuine persons, but at such a low fixed interest rate and for such a long term, that you turn out to be a loser. The atmosphere of low-interest loans in the US for the long term has hit the banks. It's a case of asset mismanagement. However, it's unprecedented and something to learn from."

A day after Signature Bank collapsed, the US administration was quick to spring into action and assure fund depositors that they would be able to access their money in SVB.

The Federal Reserve also stepped in, saying a separate entity would provide loans to institutions affected by the bank failures. 

He says that the US administration's quick action saved the crisis from assuming large proportions.

"The good thing is that the FED took the action on the first day itself, unlike in 2008, when it took 10-15 days to take a similar step." 

However, he adds that this may not be the end of the crisis, and several other issues can crop up in the near future.

"This is just the beginning, and many more small banks can come forward with bankruptcy declarations. But since the government is saying that people's deposits are safe, the crisis has been contained. But we can't rule out many more similar issues that may appear in the near future."

When asked whether only the American market will be more affected or Indian banks are also in the same boat, the ace investor says that Indian banks have a strong regulator evaluation system and won't get affected.

"In the US, it will depend on investor behaviour. If the banks get lower ratings in evaluations and are declared risky assets to invest in, investors will turn away.

"But in India, the regulator's evaluation process of the banks is strong, the sector is growing, and the banks are not dependent on foreign assets or liabilities. There may be a blink due to the global sell-off, but our banks don't have a direct connection with it and won't be affected too much."

He says that high fluctuations in the interest rate in the US also led to the crisis. "The interest rate varied there from 0% to 5%, and asset repricing became a problem. That's not the case with the Indian market, where interest rates are largely stable."
Talking about where would he advise investors to invest money in the Indian markets, Agrawal says, "The Indian market is in a good situation, and it's time to invest in financial stocks. In the US, financial stocks are a sectoral problem, and it may spill over. But here, financial stocks are still doing well. "

The SVB crisis triggered a sharp decline in the US market. When asked if the market would become more volatile in the future, he replied, "The US government has gone for a temporary remedy to the problem. But now, other banks can come forward and declare their failure. Things are still not stable yet, so the global markets are going to stay volatile for some time."

When asked about his advice to Indian investors who have already invested in the market and to those who are planning to invest, he says, "It's not a good time for short-term investors as it is a no-return phase. You are coming out of a storm, so there is no question of stability. But the market will rebound from this decline.

"Patience is the key for investors."

He added, "Markets are changing fast because global equations are changing in three to four months. But investors don't need to panic. They must have faith in themselves."

The veteran market expert advises investors to build a good portfolio and wait for some time to get good returns.

Citing his own example, he says he has seen the Indian index jump from 100 in 1980 to a peak of 60,000, but he stayed put because of patience.

"In 43 years, I have seen many ups and downs, but I have never deterred from my faith. The patience has paid dividends for me, and I advise all investors to do the same," he signed off saying.