S&P Global Ratings on Tuesday said Indian banks and rated finance companies (NBFCs) can endure potential contagion effects from the demise of Silicon Valley Bank (SVB) and UBS's hasty takeover of Credit Suisse AG. Indian institutions have no meaningful direct exposure to SVB, Signature Bank and Credit Suisse, S&P said. “The secondary impacts are 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 Global Ratings said in a report. The US-based rating firm said funding profiles have generally been a strength for Indian banks. Funding is predominantly in the form of customer deposits, a large proportion of which are from households. “Support for deposit franchises comes from the banks' wide branch networks, sizable retail customer base, and deposit insurance for small savers of up to Rs 5 lakh for deposits with individual banks,” S&P said. India's high domestic savings rate offers further support. Moreover, about 60 per cent of the banking system is government-owned, bolstering the perceived safety of bank deposits, it said. “In contrast, finance companies are reliant on wholesale funding, which is confidence sensitive. But finance companies rated by S&P Global Ratings have access to multiple sources of funding and limited concentration. Also, they have a sizable proportion of bank borrowings, spread across various banks, including those that are government-owned, and this tends to stabilize funding profiles,” S&P Ratings said. Some finance companies such as Bajaj Finance and Hero FinCorp also benefit from being part of a stronger group, and consequently have better or preferential access to funds, S&P said. Others such as Muthoot Finance Ltd and Manappuram Finance Ltd face refinancing risk because of their dependence on sizable short-term liabilities, and this is already reflected in our moderate assessment of funding for both these entities. “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,” it said. The risk of unrecognized losses hitting banks' balance sheets is manageable, S&P said. Indian banks generally hold high levels of government securities due to a steep statutory liquid ratio requirement. For example, 20-25 per cent of assets for large government-owned banks and 17-19 per cent of assets of top private sector banks are parked in government securities. In addition, about 80 per cent of these government securities are in held-to-maturity portfolios. This exposes them to the risk of unrecognized losses if interest rates rise, it said. The movement in Indian government securities has not been as sharp as in the case of US Treasuries. Policy rate hikes in India versus the US from COVID-lows have been relatively lower. For example, in India, the policy rate of 6.5 per cent is only marginally higher than pre-COVID levels, though the interest rates dropped to 4 per cent during the pandemic. In the US, on the other hand, the federal funds rate rose to about 4.5 per cent, from 0.1 per cent at the end 2021. S&P said the risk of significant unrealized losses materializing on a portfolio of high-quality liquid securities is typically contained for the banks we rate globally. However, it could be triggered for some banks with concentrated business models, or with more vulnerable funding or liquidity profiles, including more aggressive asset/liability management practices, it said. “We view these risks as limited for Indian banks. They are not overly dependent on wholesale funding, are primarily funded by retail deposits, and have sufficient liquidity since most of their investments tend to be in government securities,” the rating firm said. Credit risk in investment portfolios is also limited, S&P said. Corporate bond portfolios are small and often include relatively stronger Indian companies. Further, banks' capital has improved in recent years. The capital to-risk weighted assets ratio (CRAR) was about 16 per cent as of September 2022, which helps to absorb these losses if they materialize. A study by the Reserve Bank of India shows that, in the case of the HTM book, the unrealized loss is bigger for government-owned banks that we see as having a high likelihood of government support, if required. The investment book of rated finance companies is much smaller. These entities tend to hold their liquid assets in the form of cash and bank balances; only about 3 per cent of their assets are in government securities, which is often related to statutory liquid ratio requirement for the public deposits they hold. “Hence, we expect the proportion of unrealized losses to be low,” S&P said. It's too soon to assess the full impact of the SVB and Credit Suisse fallout, but low duration, strong funding profiles and adequate capital suggests the effect should be limited. “We have yet to see any tail risk manifesting. Foreseeable secondary effects could include increasing risk aversion by investors. This ultimately could result in higher funding costs or other negative consequences,” S&P said.
