The Union Finance Ministry on Tuesday said the Indian banking system is less prone to incidents like collapse of banks in the U.S., triggered by hurried monetary tightening. In the monthly economic review for March issued on Tuesday, the ministry also said investments in held-to-maturity (HTM) securities by the Indian banks are limited to 23% of deposits.
“The recent collapses of a few banks in the U.S. and Europe on the back of this tightening cycle have posed pertinent questions to policy makers on the vulnerability of their financial systems, particularly in emerging market economies,” the review said.
“In this context, we restate factors that make India’s banking system considerably less prone to such incidents. None of these factors characterise the Indian banking industry. Banking supervision is robust with the RBI’s overarching coverage of institutions, regardless of asset size, in its bi-annual assessment of financial stability,” it added.
“Macro stress tests are also performed from time to time on individual banks. Investment in held-to-maturity (HTM) securities is limited to 23% of deposits, reflecting an effective insulation of asset value from adverse market developments. For the assets exposed to the securities market (mostly G-secs whose value has also fallen with an increase in their yield), the investment fluctuation fund (IFR) maintained by banks provides a suitable buffer,” the review said.
The ministry added that loans constitute more than 50% of the total assets of the top ten Indian banks, thereby making them relatively immune to yield spikes. Finally, rapid withdrawal of deposits is unlikely, the ministry said. “Further, as more than 60% of deposits are held by public sector banks, depositors in India are reassured about the safety of their savings,” it added.