Indian banks immune from liquidity crisis in West: Govt officials

Government monitoring developments in the West closely, says one official

The centre is closely monitoring the "deepening" banking crisis in the United States and Europe, but believes India will not be affected as oversight and regulation have been strengthened at home following the non-performing assets (NPA) crisis last decade.

“We have already gone through our own crisis, paid the price, so to speak. Systems have been put in place by the Reserve Bank of India and the government which ensure that Indian banks don’t end up facing a liquidity crunch like the Western banks,” a top government official told 'Business Standard'.

A second official said that the financial sector's health has improved consistently since March 2018, as reflected in their improved financial parameters, including asset quality and profitability. Gross NPA ratio of Indian banks declined from 11.2 percent in March 2018 to 5.0 percent in September 2022, while capital to risk-weighted assets ratio (CRAR) improved from 13.8 per cent in March 2018 to 16.1 per cent in the same period.

“We have been monitoring the developments in the West closely. Nobody thought even till last year that regional banks in the US would start failing. One cannot predict the extent of how worse it could get, but the financial crisis in West may deepen,” said the first official, who spoke on the condition of anonymity.

Banking behemoth JP Morgan Chase agreed on Monday to buy First Republic Bank in a deal brokered by the United States government, after regulators seized the assets of the latter, the latest lender to face a liquidity crisis,.

This follows the failures of Silicon Valley Bank and Signature Bank in March. One reason for these banks facing liquidity concerns is that they all had huge investments in US treasuries. As the Federal Reserve began raising interest rates last year to cool inflation, the banks’ bond investments soured.

As fears of a global financial contagion spread in March, the Swiss government brokered a deal for UBS Group, Switzerland's largest bank, to acquire the crisis-hit Credit Suisse Group AG. UBS paid more than $2 billion to buy its rival, much lower than the $8 billion which Credit Suisse was valued at just days before the buyout.

The second Indian official said that over the past decade, after being singed by the NPA and twin balance sheet crises, the banking system has strengthened its balance sheets and improved asset quality.

“The well-capitalised banking system is now comfortable to lend, as apparent in the rising sectoral deployment of bank credit. Considerable deleveraging has improved private sector balance sheets in the past decade, translating into fast-paced bank non-food credit growth, expanding at double digits on a year-on-year basis since 8 April 2022, and recording a near 16 per cent growth on the week ending on 24 February 2023,” said the second government source.