Even as Western regulators devise unconventional rescue packages for their tottering banks, Reserve Bank of India Governor Shaktikanta Das has underlined regulatory changes in India in recent years that have imparted stability and resilience to its financial system. These range from a prudential asset-liability management framework for domestic banks and curbs on total leverage to the systematic plugging of regulatory arbitrage between banks and other financial entities.

There are good reasons why Indian banks appear less vulnerable at this juncture to risks that toppled a SVB or a Credit Suisse. One, while SVB and regional US banks have seen their capital bases dented by unprovided losses on large HTM (held-to-maturity) portfolios, Indian banks are subject to a hard regulatory limit of 23 per cent on deposit liabilities parked in HTM investments. Even a 10 per cent loss on this book thus has a deposit impact of only 2.3 per cent. Indian banks don’t over-rely on treasury and fee income, as Credit Suisse did. Two, over 60 per cent of Indian bank deposits are with State-owned banks and nearly two-thirds is from sticky retail customers. Indian banks adhere to multiple regulatory safeguards to deal with a spike in deposit outflows — an 18.5 per cent Statutory Liquidity Ratio (SLR) requirement, a 4 per cent Cash Reserve Ratio (CRR) and LCR (Liquidity Coverage Ratio) covering 30 days’ withdrawals.

Three, while the earlier Trump administration signed a law exempting US banks with under $250 billion in assets from stress testing, the RBI has remained meticulous about subjecting not just commercial banks, but also co-operative banks and NBFCs to macro stress-testing every six months. The latest stress test in December 2022 estimated that accounting for unrealised losses on HTM books from a 250-basis point spike in yields, no commercial bank would see its capital fall below regulatory norms, though seven co-operative banks could fall short. Interest rates in India were never at near-zero levels and have risen by 250 basis points in a year, while US Fed has raised rates by nearly 475 basis points in nine months.

But all this must not be cause for complacency, as rate and credit risks can play out for Indian banks too. With a rising proportion of floating rate loans, retail and MSME borrowers have seen a ballooning of obligations and banks may see rising delinquencies in the months ahead. This may trigger need for provisioning that reduces bank capital buffers. Indian co-operative banks, like regional banks in US, feature borrower and depositor concentration and are vulnerable to rate and credit risks. The RBI must therefore begin to tighten the screws on domestic banks to roll back Covid-time relaxations such as the 23 per cent HTM allowance (the normal quota was 19.5 per cent pre-Covid), while insisting on higher capital buffers to deal with unrealised losses on the HTM book. Though its next Financial Stability Report is due only in June, the RBI can perhaps conduct internal stress tests on vulnerable bank groups sooner, to identify emerging areas of stress, so that capital requirements can be shored up before rate or credit risks actually play out.