The virtual feeds have been rampant with negative news on the banking sector since the collapse of the Silicon Valley Bank in the US, and a possible spillover of the Banking Crisis globally.
Is there an impending Banking Crisis, then? Let’s look at what recent reports and data reveal.
Key Highlights
- There has been a very high growth recorded in the unsecured loans in the books of the banks.
- The post-merger profits of the HDFC Bank may be subjected to pressure.
- UBS recently downgraded SBI and Axis Bank.
- A McKinsey report reveals that despite pressures, banks posted their best-ever profits in a decade.
McKinsey and Co. released a report this October shedding some light on the status quo of the banking sector globally. The report assumes significance due to the developments in the banking industry in 2023, which faced its worst-ever crisis since the Global Financial Crisis of 2007 (at least prima facie).
Starting with the collapse of the US-based Silicon Valley Bank, several mid-tier banks in the United States had collapsed, giving rise to speculations on the possible spill-over effect of the predicament.
The fear to an extent wasn’t completely irrational.
The rancour which was earlier limited to the US found its way into Europe with the Switzerland-based Credit Suisse, one of the oldest global banks, collapsing in a jiffy.
This gave rise to questions galore. Were the Basel Norms ineffective? Does this indicate a larger crisis in the banking system?
Well, to ameliorate fears to an extent, the McKinsey report found out that despite facing multiple challenges, banks globally posted their best-ever profits in a decade. The report notes that the interest rate hikes by Central Banks have improved the Net Interest Margins (NIMs) of banks, leading to higher profitability.
On the banking sector in India, the report categorises banks in the countries neighbouring the Indian Ocean as the best-performing banks when compared with their Atlantic or Pacific counterparts. It thus contends that half of the best-performing banks in the world are based in the crescent formed by the Indian Ocean. Further, it expects the revenue of the banking sector in India to grow by approximately 10% CAGR in 2021-30, only behind Vietnam’s expected CAGR revenue growth of 12%, and Tanzania and Mozambique’s expected CAGR revenue growth of 11% in the Indian Ocean crescent.
Are Banks in India insulated from a Banking Crisis, then?
India has so far been vigilant when it comes to the banking sector.
It was able to insulate itself from the Global Banking Crisis of 2007 due to restrictions on Capital Account Convertibility, adding friction to the velocity of hot money.
Similarly, the factors responsible for the collapse of the Silicon Valley Bank were simply absent in India.
In addition, the RBI has been proactive through its Prompt Corrective Action (PCA) mechanism to rectify concerning trends before they turn into systemic threats.
However, nothing is guaranteed in economics.
The RBI has recently advised banks to bolster their internal surveillance mechanism so as to ensure they have healthy balance sheets. The advice came amidst a very high growth recorded in certain components of personal loans.
At the same time, the recent HDFC Bank merger put pressure on its Net Interest Margin (NIM), leading the HDFC Bank share price to fall by around 4% in a day.
In addition to that, UBS, a brokerage firm highlighted that the share of weak borrowers in the books of the banks has increased considerably, along with an increasing credit cost. This led to the firm downgrading its rating on the shares of SBI and Axis Bank.
These factors, combined with a subdued rural demand due to the El-Nino effect pose a challenge to various industries, which can further hamper the books of the banks.
While the Banking Crisis may not be an impending reality in the near future, the government and the Central Bank must keep an eye to prevent the compounding of negativities observed.
The health of the Designated Systematically Important Banks (D-SIBs) is especially important in that respect, two of which include the HDFC Bank and the State Bank of India (SBI), which have been in the news due to certain concerns.
