The SVB crash could cue how to fortify banks in India

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Source: The post is based on the article “The SVB crash could cue how to fortify banks in India” published in the Livemint on 11th May 2023.

Syllabus: GS – 3: Effects of liberalization on the economy.

Relevance: About SVB failure and its lesson for India.

News: The collapse in the US of Silicon Valley Bank (SVB) might offer some lessons to strengthen Indian banking system. 

About the collapse of SVB

Must read: Silicon Valley Bank crisis: Reasons and Impacts - Explained, pointwise

What will be US Fed decisions and How it will impact India?

Read here: Central banks step in as Credit Suisse collapses. India must monitor channels through which crisis can permeate into domestic economy

How India can act as a role model to prevent a bank crisis? 

Read here: SVB, Signature Bank collapse: What are ‘Too-Big-To-Fail’ banks, and what makes Indian banks safe and Why local banks are insulated from SVB ripples

What are the tweaks that can be made to make Indian banks more robust and agile?

Categorization serves no purpose: In India, banks categorize retail and bulk deposits (each with their own definition) and disclose the profile of such deposits. The lesson from SVB is that this categorization serves no purpose.

Follow graded insurance premium: Only bank deposits of ₹5 lakh and below are insured in India, Indian banks must be mandated to disclose the percentage of their deposits below ₹5 lakh per customer in the deposit rate card published on their websites. So that the RBI can ensure that the banks with higher-than-average uninsured deposits pay a higher deposit insurance premium compared to banks with an appropriate level.

Blended SLR maintenance: If a deposit is insured and cash reserve ratio (CRR) is maintained on it, then there is no need to maintain high statutory reserves (statutory liquidity ratio or SLR) on insured deposits. Instead, India can have differential reserve prescriptions between insured and uninsured deposits. For example, RBI can mandate an SLR of 10% on insured deposits and 23% on uninsured deposits. This would incentivize banks to focus on granular deposits to lower their grossed-up cost of deposits.

Study the data: Data on the correlation of deposit behaviour among departments and entities of a single state government or multiple entities within a corporate group or bulk deposits from entities in a single industry can be studied and concentration metrics introduced to track the proportion of such deposits.

Remove regulatory arbitrage between NBFC and Banks: RBI has to regulate and supervise deposit-taking non-banking financial companies (NBFCs) which function like banks. This is because the deposit-taking NBFCs also maintain reserves on public deposits.

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