India’s banks can withstand fallout from US bank failures, Credit Suisse sale

The companies have manageable exposure to these banks.

Indian banks and finance companies are capable of enduring potential ill-effects from the banking problems in the US and Europe, according to S&P Global Ratings.

The ratings agency noted that Indian institutions have no meaningful direct exposure to US lenders Silicon Valley Bank (SVB) and Signature Bank– which abruptly collapsed between March 10 to 12– or Credit Suisse, which recently announced that it is being acquired by Swiss rival UBS.

“S&P Global Ratings expects the secondary impacts to be manageable, although the decision to write-off Credit Suisse's additional Tier 1 bonds may contribute to a higher cost of capital for banks. Only a significant escalation would lead us to change our view,” S&P wrote.

India's high domestic savings rate offers further support.

About 60% of the banking system is government-owned, further bolstering the perceived safety of bank deposits.

Notably, Indian banks generally hold high levels of government securities due to a steep statutory liquid ratio requirement: 20%-25% of assets for large government-owned banks and 17%-19% of assets of top private sector banks are parked in government securities. About 80% of these government securities are in held-to-maturity portfolios, S&P added.

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However, this exposes them to the risk of unrecognized losses if interest rates rise. 

Amongst entities, Bajaj Finance and Hero FinCorp both benefit from being part of a stronger group, and have better or preferential access to funds, S&P said.

Muthoot Finance and Manappuram Finance, on the other hand, face refinancing risk due to their dependence on short-term liabilities. 

“Mitigating factors include positive asset-liability management. This stems from the fact that a large portion of their assets are short-term gold loans, which are self-liquidating, and are a constant source of liquidity,” the rating agency said.

It added that Muthoot Finance and Manappuram Finance also have a high level of equity capital, at just over a quarter of their total liabilities. 

Shriram Finance, meanwhile, is strongly reliant on confidence-sensitive wholesale funding sources such as securitization, which could lead to higher volatility in funding costs.