Silicon Valley Bank collapse: Indian Banks are not at risk from SVB contagion, say experts - heres why

Silicon Valley Bank's (SVB) collapse has triggered serious concerns among investors since last week. As the US economy is going through another rough patch after the Lehman crisis, many feared that the Indian banking system may not get respite from the heat of the same. While the investors and bankers feared the spillover effect in India after the SVB collapsed, economists and analysts decode that Indian banks are not at risk. 

Here are the top reasons highlighted by the experts that are shielding the Indian banking system from the spillover of the US economic distress:
 

Low exposure to SVB

Economists highlighted the fact that Indian banks have very low exposure to the SVB, thus there is hardly any risk involved. “The SVB collapse is unlikely to turn into a systemic risk. India’s banking system exposure to the SVB collapse is low and the health of the banking system remains sound. There are likely to be some continued spillovers in financial markets (rupee and bond yields) as a rush to safety weighs on emerging market assets,” said Sakshi Gupta, Deputy Vice President of HDFC Bank. 

Better capital position

The capital position of banks is measured by the difference between a bank's assets and its liabilities, and it represents the net worth of the bank or its equity value to investors. Economists pointed out that the overall capital position of the banking system in India is strong enough to safeguard itself from such an external crisis. “Indian banks' capital position has improved over the last few years. The Indian banking system has enough capital buffer to meet regulatory requirements. The Financial Stability Report of RBI in December 2022 shows that all banks will meet the minimum regulatory capital requirements even in severe stress scenarios. Contagion risk is limited in the Indian banking system,” added Dr Sudarshan Bhattacharjee, Principal Economist of Yubi, formerly known as CredAvenue, an Indian fintech company. 

Low NPA and strong CRAR

All the scheduled commercial banks have recovered their non-performing assets (NPAs) considerably well within the last few quarters, shows the data of their quarterly results. With the fall in NPA, the banks have been able to have a strong capital-to-risk weighted assets ratio (CRAR), highlighted economists. CRAR is a financial ratio that measures a bank's capital to its risk. In other words, CRAR is the amount of money a bank has in reserve to cover losses on its loans. “Indian banks are well capitalized with lower NPA and CRAR is also above 15 percent for the scheduled commercial banks, thus the risk is minimal for them from SVB crisis,” added Sarbartho Mukherjee, Economist, Mahindra group. 

RBI’s less aggressive policy than the Fed

Several economists agreed to the fact that the Reserve Bank of India (RBI) has taken calculative measures and has been less aggressive in terms of monetary policy tightening, as compared to the Federal Reserve. Fed raised the repo rate by 450 bps between March’22 and Feb’23, whereas RBI raised it by 250 bps within this period. According to economists, one of the major factors that led to the SVB crisis could be the extreme tightening of monetary policy by the Fed. But, with RBI being less aggressive in its monetary tightening, it is unlikely that Indian banks could face such a challenge. “Moreover, RBI has implemented countercyclical measures like investment fluctuation reserve in 2018 after the ILFS crisis. This will absorb losses from fluctuations in asset valuation when yields rise,” Mukherjee added.