GUEST
The SVB crash could cue how tofortify Danks in India
SRINIVASAN VARADARAJAN
start with my favourite quote: “Everything
that never happened before happens all
the time.” An example was the collapse in
the US ofSilicon Valley Bank (SVB). It was on
account ofa ‘liability-siderisk concentration’
curveball and not any ofthe triggers that had
caused bank failuresin the past.
The best analogy forthe SVB collapse was
H&'
J the mandated implosion ofthe illegal Super-
is non-executive chairman of tech towers closer home. It happened in a
Union Bank of India flash and in plain sight for everyone to watch.
One can even argue that the actions and
eventsleading to its downfall were all in the
public domain and their implicationsstaring
glaringly at all stakeholders. Clearly, SVB’s
mark-to-market losses (even with assets in
the held-to-maturity book) were beingdis-
closed toits board and regulators. Somehow,
stakeholders seem to have assumed these
were ‘notional and not something that could
bring down the bank. Noliquidity-coverage
mandate and stress-test metric would have
flashed red, and it was business as usual until
the deposit-withdrawal tornado hit.
While the primary focus hasbeen on SVB'’s
mark-to-market losses on its investment
portfolio asthe basic cause ofits collapse, the
depression that drew in the tornado was the
concentration ofrisk on theliability side. Its
homogenous profile of depositors and reli-
ance on big-ticket deposits from a single
industry (and region) was arisk that was not
factored into any stress test. It istime to look
at ‘persons acting in concert’ even on the lia-
bility side. Large venture capital funds (VCS)
with material investments in multiple start-
ups havea disproportionate say in their oper-
ations. With VC instructions flying to their
portfolio companies, it was akin to people
acting in concert (a never-before event).
Social media had its own role in the tornado
moving from Level FO to F5 within hours,
leaving crisis-management teamsat the bank
and the regulator little time toreact.
All this said, mdian banks are an oasis of
stability and the SVB crisis seems more like
another nail-biting Netflix thriller to watch
from afar than anything else.
However, are there any lessons forregula-
tory prescriptions in India? What could we
tweak to make Indian banks more robust
and agile?
One important question for all global regu-
latorsis whether we need to categorize a few
large banks as Systemically Important Banksdeposit rate card published on their websites.
(SIBs). Ifthe regulator stands ready to back-
Could the regulator have a graded insurance
lowertheir grossed-up cost of deposits.
Could theregulator start defining ‘persons
stop every bank, large or small, in the system,
premium such that banks with higher-than- acting in concert’ on the deposit side? For
then why dowe need to have SIBs and impose average uninsured deposits pay a higher example, excessive reliance on deposits from
an additional burden on them? deposit insurance premium compared to departments and entities ofasingle state gov-
Whileregulators have prescribed numer- banks with an appropriate level of granular ernment or multiple entities within a corpo-
ous metrics for liability concentration andinsured deposits? rate group or bulk deposits from entitiesin a
liquidity, the SVB episode Here isanother pertinent single industry. Dataon correlation ofdeposit
has brought to the fore a question: If a deposit is behaviour among such clusters can be stud-
very important one: the Let's not waste a insured and cash reserve ied and concentration metrics introduced to
ratio ofuninsured deposits icCic i ratio (CRR) is maintained track the proportion of such deposits.
tototal deposits. In the case crisis IN the Us on it, what is the need to Finally, coming to deposit-taking non-
of SVB, thisratiowas more 3 maintain statutory reserves banking financial companies (NBFCs). Every
than 90%, implying an but review our (statutory liquidity ratio or insolvency resolution of such large NBFCs
excessive reliance on large own ban kinड SLR) on insured deposits? If has protected depositors with deposits of¥5
deposits. the regulator believes that lakh and below, and is now seen as the
In India, banks catego- safety systems removing it is too drastic a expected norm in any resolution plan. Since
rizeretail and bulk deposits stepright away, can we have deposit-taking NBFCs maintain reserves on
(each with their own defini- in the light of differential reserve pre- public deposits and RBI has almost elimi-
tion) and disclose the pro- scriptions between insured nated all regulatory arbitrage between banks
file of such deposits. The SVB learnings and uninsured deposits? and NBFCs, why not go the whole hog? Let
lesson from SVB is that this For example, mandate SLR such NBFCs pay an insurance premium and
categorization Serves no of 10% on insured deposits get their depositsinsured, like banks do, and
purpose. What matters is the proportion of and 23%on uninsured deposits, resulting in let RBI regulate and supervise such NBFCs
deposits that are insured, whether in current, ablended SLR maintenance close to the cur- like banks, ajourney already on the last lap.
savings or term deposit accounts. Given that rently mandated SLR. Taking into account While the SVB tornado has not created
only bank deposits of¥5 lakh and below are the systemic data available with it, the even faint ripples in Imdia, there are things we
insured in India,mdian banks must be man- Reserve Bank of India (RBI) could adjust could do to further fortify our banking sys-
dated to disclose the percentage of their theseratios appropriately. This would incen- tem. Let’s not waste someone else’s crisis.
deposits below 5 lakh per customer in the tivize banks to focus on granular deposits to Let’sget the ball rolling right away.