Banking system in India remains strong despite market concerns

The RBI assures stability as IndusInd Bank addresses a one-time discrepancy, reinforcing the resilience of India's banking sector amid strong liquidity and regulatory oversight

Recent speculation regarding IndusInd Bank has led to some unwarranted speculations among depositors about the health of the above bank. However, a closer look at the fundamentals of the above bank and Indian banking system makes it clear that there is no reason for any alarm.  India’s financial institutions remain resilient, well-capitalised, and robust under strict regulatory oversight of the RBI, ensuring the stability of the system.  The Indian banking sector is governed by the Reserve Bank of India (RBI), which is renowned worldwide and has implemented stringent regulations to ensure financial stability. The Central Bank maintains robust oversight, requiring banks to adhere to stringent capital adequacy norms, maintain liquidity buffers, and uphold prudent lending practices. This regulatory

vigilance has ensured that even in times of economic uncertainty, Indian banks remain secure.  The RBI’s periodic stress tests further reinforce the strength of the sector, ensuring that banks can withstand economic shocks effectively.  The recent IndusInd Bank incident

  To capitulate, one of India’s largest private sector banks, IndusInd Bank, recently said it had found certain discrepancies in its derivatives portfolio. As per reports, the management said it was a one-time event. It expects to fully absorb the financial impact of this discrepancy in the fourth quarter and will remain profitable for the quarter and the financial year. The bank also

emphasised that it is adequately capitalized and growth oriented. 

If one carefully looks at the data, IndusInd Bank continues to exhibit strong fundamentals. The bank has consistently maintained healthy capital reserves, diversified loan books, and a stable asset quality. While any financial institution may face cyclical challenges, IndusInd Bank’s solid risk management practices and steady deposit growth indicate its ability to navigate such periods effectively. 

Looking at the event, it is clear that the issue primarily concerns a part of the bank’s business - which it is already addressing - and does not indicate a broader problem in the banking system. For investors and depositors, it is important to focus on the fundamentals rather than reacting to short-term market speculation. To its credit, the RBI has sprung into action and has sought compliance reports on 12 th March.  The RBI has just issued a statement stressing that the above bank’s financial health remains stable and is being monitored closely by Reserve Bank, and as such, there is no need for depositors to react to the speculative reports at this juncture. 

RBI has also clarified that for the quarter ended December 31, 2024, the bank has maintained a comfortable Capital Adequacy Ratio of 16.46 per cent and Provision Coverage Ratio of 70.20 per cent. The Liquidity Coverage Ratio (LCR) of the bank was at 113 per cent as on March 9, 2025, as against regulatory requirement of 100 per cent.  

RBI has directed the Board and the management to have the remedial action completed fully during the current quarter viz., Q4FY25, after making required disclosures to all stakeholders. 

The RBI and Indian Banking Sector’s stability 

Over the last two decades, RBI has consistently maintained a conservative stand, requiring banks to maintain robust capital buffers and adhere to strict prudential norms. As of March 31, 2024, the capital adequacy ratio of scheduled commercial banks as per a BS report was a healthy 16.9 per cent, above the Basel III requirement. 

Non-performing assets (NPAs), a critical measure of banking health, have dropped to 3.12 per cent as of September 2024 - a result of the RBI’s efforts in strengthening balance sheets since the 2016 Asset Quality Review. 

High liquidity & no broader systemic risks 

Liquidity, the lifeblood of any financial system, remains abundant in India. The RBI has skilfully managed liquidity to support economic growth while keeping inflation in check. In March itself, as per DD News, the central bank directed for injection of Rs 1.9 trillion into the banking system helping both banks as well as NBFCs. In January too, the central bank announced open market operations (OMOs) of Rs 60,000 crore to inject liquidity into the system. 

The RBI’s regulatory framework, including the Banking Regulation Act and Foreign Exchange Management Act (Fema), balances cross-border liquidity movements and capital repatriation, insulating India from external shocks. This was evident post-2008 when foreign banks retreated globally, yet India’s financial system stood firm due to RBI-enforced local incorporation rules.

 

The RBI’s supervisory mechanisms have shown that the central bank can handle instances like the Yes Bank crisis in 2020, where the RBI swiftly orchestrated a rescue with a consortium of banks, averting a depositor panic. 

Similarly, the IL&FS default in 2018 led to further tightening of oversight to prevent a domino effect across shadow banking. These examples affirm that one-off events are manageable within India’s robust framework. 

With such a proactive and reactive approach to the market developments, the RBI’s actions have ensured that the Indian banking system has consistently avoided systemic risks, even during global upheavals. 

Proactive regulation

  The RBI’s conservative approach-sometimes critiqued as overly cautious - has been India’s proactive shield against global financial contagion. During the 2008 financial crisis, while western banks collapsed under subprime mortgage exposures, Indian banks emerged remained unscathed. The RBI’s insistence on high reserve requirements and limited exposure to toxic assets ensured stability. 

Thus, it can be safely said that the Indian banking system exhibits stability and consistency against any contagion amidst a rapidly evolving global scenario.  

Historical precedents like the 2008 crisis highlight the RBI’s stellar role in safeguarding India’s financial health. As occasional hurdles arise, the RBI’s targeted interventions will continue to prove their mettle, maintaining trust in a system that stands tall amidst global uncertainty. Depositors, investors, and the general public can remain confident that the Indian banking sector is well-positioned to navigate any challenges for ensuring country’s economic growth.

  (The writer is the chairman of Competition Advisory Services India LLP (COMPAD). He has also served as the executive director at World Bank for India, Sri Lanka, Bangladesh and Bhutan and first chairman of CCI)  

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper