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Explainer: How strong are the banks in India as compared to America, how safe is the public’s money

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New Delhi : Last Friday, when the closure of America’s largest Silicon Valley Bank (SVB) was announced, there was chaos among startup companies in India. The reason for this was that most of the world’s startups including India have opened their accounts in Silicon Valley Bank and billions of dollars are deposited in these accounts. Of this, about $250,000 is an amount that is not insured by the Federal Deposit Insurance Corporation (FDIC). Therefore, due to the closure of Silicon Valley Bank, the startup companies of India saw their money sinking and in a hurry, they also tried to withdraw their deposits.

Right now the US government and the central bank were making efforts to deal with this crisis that on last Sunday another signature bank was also closed. After the closure of two big banks of America within a week, questions are also arising that how strong is India’s banking system as compared to America and how safe is the hard earned money of the public in the banks here? Come, let’s know the answers to these questions…

Lessons from the 2008 recession rescue plan

According to a media report, last Friday the world came to know that the 40-year-old Silicon Valley Bank of America will be operating under the receivership of the Federal Deposit Insurance Corporation (FDIC). The story of the California-based lender’s collapse was fabricated in less than two days. However, on Monday, there was relief news for the depositors of Silicon Valley Bank, when the US Treasury, Federal Reserve, FDIC and Joe Biden administration announced a rescue plan to safely return the public’s money deposited in the bank.

The three agencies (US Treasury, Federal Reserve and FDIC) said in their joint statement that all Silicon Valley bank depositors (only those non-insured by the FDIC) will have access to their funds from Monday and taxpayers will not suffer any loss. . Protecting the bank’s depositors, the US government also announced the closure of the New York-based Signature Bank, assuring its depositors that their deposits would be made fully available for withdrawal if necessary. The Fed also announced a $25 billion backstop for banks that failed to pay their depositors. This step was taken by these three agencies as a lesson of 2008 recession.

Global financial stocks lost $465 billion

If media reports are to be believed, the steps taken by the government and three financial agencies to provide relief to the depositors after the closure of Silicon Valley Bank was a quick action to bail out the bank from the crisis. While prompt action was taken by the top US institutions, appropriate assurance was also given to the depositors. The US President also condemned those responsible for the ‘mess’ at SVB Bank, vowing to take them to task, along with a regulatory mechanism working towards protecting deposits. This type of action was also needed because investors around the world were falling short on banks in their respective geographies due to the collapse of America’s 16th largest bank. Global financial stocks lost $465 billion in the wake of the Silicon Valley Bank financial crisis as of Monday, according to Bloomberg.

What is the condition of banks in India

It is said that the banking system is a system where panic spreads faster than most regulators. Rapid response is vital to maintain public confidence in the banking system. In this sense, there are some lessons from the Silicon Valley episode that can work very well in India. If we talk about India’s banking system, till February 21, 2023, there were about 2,029 banks in India, where deposits were insured. These include public sector banks, private sector banks, foreign banks, local area banks, regional rural banks and cooperative banks.

How safe is the deposit in Indian banks

According to a media report, out of the total deposits of Rs 165 lakh crore in these banks till March 31, Rs 81 lakh crore was insured by the Deposit Insurance and Credit Guarantee Corporation. In comparison, the DICGC had a fund of Rs 1.47 lakh crore, while the deposits covered under this insurance scheme is only 46 per cent of the total deposits and the coverage is 98 per cent by the number of depositors’ accounts. The main difference in Sankalp comes out in the way regulatory and other agencies operate in India.

Depositors’ access to money in India

It did not take US agencies even a week to provide full access to the depositors of Silicon Valley Bank. What is the situation in India? The DICGC procedure states that depositors of a liquidated or reconstructed bank will have access to insured deposits of up to Rs 5 lakh per depositor within two months of receiving a claim from the depositor. Access to any deposits in excess of the insured amount depends on the type of bank’s resolution. Specific timelines for deposit payments were formalized only in 2021 when the government amended the DICGC Act, but the reality of timely payments is not the same for all lenders.

No lesson even from Punjab & Maharashtra Bank and Yes Bank case

In the Yes Bank rescue plan of March 2020, depositors had to wait for about a fortnight before accessing their funds. A consortium of financial institutions supported the private lender with equity infusion, while the Reserve Bank of India provided an emergency liquidity window of Rs 50,000 crore to make payments to depositors. When it came to Punjab & Maharashtra Bank, which went bankrupt in 2019, the withdrawal delay was even longer. After banning deposit withdrawals in September 2019, the regulator came out with a draft resolution plan in November 2021, which was finalized only in January 2022. Only then were depositors able to access their fully insured deposits of up to Rs.5 lakh. The repayment plan for large depositors promises a 10 year long repayment tenure.

Why depositors in India have to wait

Can DICGC be made to move faster than this? Obviously once the RBI has taken steps to reconstruct a commercial or co-operative bank or to put it under some regulatory stringency, it is inconceivable why the insured depositors need to wait. That too in an era where artificial intelligence and machine learning are becoming the norm in the financial services industry. It is not an exaggeration to say that the safety of depositors’ money in Indian banks is very bad. Whenever there is an apprehension of a lender going bad, the regulator takes swift action.

At RBL Bank, when the regulator appointed an additional director on the board in December 2021 after CEO Vishwaveer Ahuja abruptly quit, it issued a statement assuring the public that the lender’s financial health was satisfactory. Similarly, last month when there was growing apprehension of infection spreading in the banking system due to Adani Group, RBI issued a statement assuring everyone that Indian banks are in a strong position.

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