Are Indian Banks Safer as Compared to the American?

KAKALI DAS

The Punjab and Maharashtra cooperative bank, which underwent financial scam 3 years ago, withdrawals were restricted, and people aren’t able to withdraw their hard earned money yet.

Banking crisis in the USA made headlines last week – everyone has been discussing about why the banks collapsed and who is responsible for it. Other questions have surfaced after the collapse of the American Silicon Valley Bank – such as its effects on other banks, etc.

Can increasing global banking crisis be stopped? What will be its effect on Indian banks? Are Indian banks safer as compared to the American?

Undoubtedly, the US govt. and US Federal reserves are to be condemned for banks collapse. When loan to deposit ratio was merely 45%, which should be 80-90% ideally – what were they doing? What is Loan to Deposit Ratio?

For an instance, a reliable bank would give out 80-90 crore loan on a 100 crore deposit and make profit on interest on loans. And, the rest will either be invested or kept as available cash. But, Silicon Valley Bank management invested over half the deposit on loan term bonds – a scheme by Govt. to make money. The collapse also happened because Silicon Valley Bank founders were already loaded with money – they deposited VC money to bank.

When there were no loans, money was invested in bonds. Then, federal reserves increased interest rates; the bank booked losses as bond prices fell. Bank had to sell assets to keep afloat – but it was too late, as fear spreads faster in digital age. Suspicious customers withdrew money as the bank started selling assets – as a result, the bank collapsed, and the faith upon banks and banking system diminished.

Are Indian Banks Safer as Compared to the American?

In the last few days, billions of dollars were spent to save collapsing banks. For ex – few large banks combinedly injected $30 billion to rescue First Republic Bank.

The fear of banking collapse in America is so real that the US Central Bank gave $318 billion emergency loan to the other banks – an increase of $300 billion in just a week. This shows how big a problem it is – comparatively, during Covid19, $130 billion assistance was given.

After the biggest 2008 crisis, $430 billion assistance was given, so the new number is pretty close, and hence the comparison to 2008. Question is, will 2008 repeat in 2023?

Experts believe that the Fed and the US govt. was too late, even though the collapse was in the making for years. Credit Suisse also got affected as main shareholders announced to discontinue further financial support. Swiss National Bank had to jump in to rescue. Finally, UBS decide to buy Credit Suisse for just $3 billion – a bank once worth $70 billion.

Central banks around the world are trying to stop the financial pandemic – joining hands to avoid another financial crisis. After all these negative instances, the stock market had to be impacted badly. In the Indian stock market, the collapse of the Silicon Valley Bank (SVB) has wiped off Rs 10 lakh crore from the pockets of Dalal Street investors, and left Sensex down to nearly 2,500 points in 4 days.

Bigger question is – if a bank collapses in our country, what will happen to the depositor?

What happened to Yes Bank? It was also rescued by other big banks that injected money into the system – 3 years lock in period was applied. After the lock in period is over – saving the bank seems to be harder, as share price falls.

While we are questioning what Federal reserve did to save banking system – question must also be asked what are small co-operative banks doing here, especially the ones involved in scams. It must be found out, which is more stable – Indian or American banking system?

Fed or RBI – which is more proactive and what can be learned from American banking system? And most importantly, the depositors of which country is more safe – Indian or American?

4814 banks are FDIC insured in America. In India, there are 1 lakh+ banks including private, public, rural, etc. Mostly are Primary Agricultural Credit Society or PACS – working on grassroots level. Except these very small banks, other banks are DICGC – Deposit Insurance and Credit Guarantee Corporation insured. The banks in the US are regulated by Federal Reserve System or Fed, and in India by Reserve Bank of India or RBI.

Fed is not controlled by the Govt., whereas RBI is controlled by Central Govt. In any country, to open a new bank, permission is requested from Central Bank – in India, RBI controls all banks, while in the US, every district has independent federal reserve.

On top of 12 federal reserve districts is Federal Reserve System. This makes it easier to regulate banks. If RBI adopted this system, then small banks won’t be able to cheat so easily.

The role of Fed or RBI are basically the same – ensuring safety of financial institutions, issuing monetary policy, changing interest rates, etc. to control supply-demand. What if the banks do collapse in a country? Which country’s bank benefits the depositor? How much money in bank account is safe?

Both countries – India and America – have their own deposit insurance corporation, known as DICGC and FDIC respectively. Both are Govt. controlled – how much insurance cover do they provide?

DICGC provides security up to Rs5 lakhs of deposit, whereas, FDIC provides security up to $250,000 or Rs2 crore of deposit or security to the account holders. Although, our govt. increased insurance limit from 1 lakh to 5 lakhs – but the demand is to further add to this to provide relief to depositor in case of banking failure.

An average person deposits life savings in the banks – then it is most unfortunate if the bank collapses for some reason. How much time does it take to get back the insured amount? In India, it takes up to 90 days to receive the insurance money, while in the US, it takes within 2 working days. The America Silicon Valley Bank customers got their money in 2 working days.

Which country among the two is better able to manage during a crisis? RBI imposed moratorium, took over management and proposed restructure scheme after Yes Bank scam. What about the depositors?

It was only allowed to withdraw Rs50,000 per person after moratorium was lifted. As far as the Punjab and Maharashtra Cooperative (PMC) bank is concerned, it has not yet returned money of the depositors with more than 5 lakhs in account. And, now, according to a new restructure scheme, it may take up to 10 years to return the depositors’ money. Because PMC was a co-operative bank, there was less attention from RBI, and hence more chance of scam.

In comparison, let’s look at the Silicon Valley Bank (SVB) collapse. The scam took place on a Friday and it was announced that the depositors can withdraw even more than the insured limit from Monday.

In fact, HSBC bought out SVB UK unit in 3 days post the scam. But the US govt. closed both the banks permanently – investor faced loss, not the depositors. Ideally, there was no bail out from the problem. Similar happened with the Signature Bank as well – the US govt. said that it will return money of all its depositors, and not the shareholders. The shareholders were aware of the risk – there was chance of profit, but when it failed, the investor lost money, not the depositor.

On one hand, the Indian govt. rescued the bank, but depositor did not get their money. On the other hand, the US closed the bank and saved the depositors money.

Both countries’ Govt. and banks need to focus on risk management, especially as recession is looming. Reason of failure for Indian bank was bad loans and non-performing asset (NPA), while for the US bank was wrong decisions, and bad money management skill.

But one advantage of India is that we don’t like borrowed money – i.e. credit. Where in America, 84% of population have credit cards, in India, it is even less than 5%. Which is why, Americans easily fall in debt trap.

Like, during the collapse of Lehman Brothers – people bought property, used it as mortgage, got more loan. When property prices fell, Lehman Brothers could not get their money back, and collapsed. Indian banks survive crises because people here are not debt ridden. Indian banks mostly rely on small local depositors. But the bigger American banks rely on big start-ups, venture capital, bonds.

To conclude – Both Indian and American bank systems are strong – but chances of failure is higher in America. But, America takes quick action compared to India. India’s conservative approach keeps the banks safer here than, say in America. Govt. has to ensure not only large, but also small banks to not collapse. But we must also take steps to keep money safe – can’t always rely on the Govt.

Measures that citizens can take –

Diversify deposits in multiple banks, if you have more money.
Keep a watch on bank metrics – NPAs, Revenue, Profit, Loan Deposit Ratio (LDR), Net Interest Margin, etc.
Be updated on latest bank policies
Deposit money on Domestic Systemically Important Banks (D-SIB) like SBI, HDFC, ICICI etc. These are considered as extremely important banks for the Govt. and if ever they collapse, the entire economy will too.
Diversify your portfolio – multiply your money. Gold and crypto prices increased quite a lot in the past weeks. Don’t keep all eggs in one basket – invest in property, equity, gold, etc.

[Images from different sources]

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