PERSISTENT BANKING CRISIS AND INDIA

 According to The Economist the banks had been fixed after the nightmare of the  financial crisis in 2007-09....they still have the power to cause heart stopping scare..A ferocious run at Silicon Valley Bank (SVB)on March 9th saw$42 billion in deposits flee in a single day and consequently SVB collapsed .Even prior to that on  March 8 Silvergate Corporation Bank collapsed , March 12th witnessed the fall of Signature Bank.SVB is  just one of the three American banks lenders to collapse within a week others being the Signatures Bank and Silver More recently as a continuation the First Republican Bank of USA collapsed However First Republic Bank was taken over by a major  bank namely JP Morgan Bank.JP Morgan will assume all deposits and substantially all assets of  First Republic. Deposits are federally insured by the Federal Deposit Insurance Corporation (FDC)subject to available limits applicable.Such a deal enabled  JB Morgan to become USA's largest bank. Urgent measures were adopted by the regulators to address  customers repeatedly asking  whether their money is safe?.  Investors were terribly  frightened. It is estimated that so far about $ 229billion has been wiped out from the market value of America's banks this month. It may be noted here that  in the past SVB taking advantage of low interest rates and high  asset prices  invested much on long-term bonds. Afterwards the Federal Reserves increased interest rates rapidly after nearly four decades.Consequently bond prices plunged and the bank was left with huge losses. Interest rate failure was attributed to be the principal cause for  failure of  both SVB and Signature Bank. Meantime the banking crisis spread from USA to Europe when Switzerland's Credit Suisse bank collapsed partly due to its shady dealings and involvement in scandals . like First Republic Bank which was rescued by JP Morgan bank, Credit Suisse bank was rescued by its rival UBs Bank.

 Banks have been suffering from runs since 1930s. Banks are repositors of depositors cash. Banks in turn put cash in investments and generate income. Normally it is a  good way to create wealth. But it may lead to a crisis if each and every one panics and tries to withdraw their funds simultaneously. According to professor Douglas W Diamond " The system is very vulnerable to the fear of fear".Banks are intrinsically illiquid and vulnerable to Bank runs  and that itself creates the trigger for bank runs. Bank runs are very distressing for common depositors like farmers, pensioners, gig economy workers and those getting payments through their phones. .Usually Governments adopt a three Pillar approach to solve this problem 1.Prudential regulation that tries to  cap the risk of bank failure.2.The Central bank applies "lender of the last resort " borrowing window for the banks,aiming to lend freely against good collateral  and 3.There is special bankruptcy mechanism for banks that work promptly and pays deposit insurance to ordinary depositors.According to experts transparency makes Central banks more trusted and effective. International Monetary Fund (IMF) has developed Central Bank Transparency Code to cater to help member countries requirements for increased trust and support. It aims to facilitate more effective communication between Central Banks and their different stake holders, reducing uncertainty and contributing to better policy choices. Significantly more transparency and accountability are required to maintain public support to Central banks, safeguard independence and enhance policy effectiveness. A voluntary Code allowed Central Banks to measure transparency on  key pillars like Governance, Policies,Operations and outcomes.

As the Non Performing Assets (NPA) began to shoot up in  India in the last decade impinging macroeconomic and political consequences different methods were designed to regulate NPAs.RBI brought  several regulations to improve NPA detection and resolution before the implementation of Insolvency and Bankruptcy Code. It has been observed that due to prompt intervention of RBI India is relatively better equipped to deal with both global economic slow down and the balance sheet of banks .Banks balance have significantly improved over the last few years due to emphasis on risk management , diversification of deposits and asset base.Banks were trained to focus detailed crisis management, communication strategies etc.Managements of  Public Sector banks examined at business models closely to identify stress points including concentration risks and adverse exposures and  they were instructed to follow best corporate governance practices, adhere regulatory norms ,ensure prudent liquidity management and continue to focus on having robust asset liability and risk management.It may be noted here unlike Silicon Valley Bank which exposed to global risks  Indian banks largely rely on local deposit cushion.However we should not repeat the mistake of lending to  a large number of unviable companies and projects with unrealistic expectations.In this context  former RBI Deputy Governor Viral Acharya suggested that the top five Indian conglomerates including Reliance Group,Tata Group,Adani Group, Aditya Birla Group and Bharti Telecom should be dismantled as their market dominance could be responsible for keeping core inflation persistently at high level.Evidently these conglomerates have grown at the expense of smaller local firms. On the other hand government's high tariff wall protected these conglomerates from competition from foreign firms. With regard to capital market regulation now in order to protect investors interest SEBI made it mandatory for the top  100  listed companies by market capitalisation to verify, confirm or deny any market rumors with effect from 1st October 2023 and the top 250 listed entities by market value would need to adhere to the norm by April 2024.SEBI has also allowed private equity firms to own stakes in Asset management companies that operate mutual funds.

Globally the cycle of aggressive interest rate hikes by central banks which began in last February to fight persistent and stubborn inflation appears to be nearing an end.Many countries including India, Australia, South Korea, and Indonesia have already paused policy rate hikes.Both the  European Central Bank and The US Federal Reserve also lowered the quantum of hike in their policy rate to just 25 basis  points in recent policy meet.The committee anticipate that "some additional policy firming may be appropriate ". The ongoing banking crisis which has partly been caused by Federal reserves aggressive rate hikes could also be weighing the The Federal Reserve revised stance.It will impact Reserve Bank of India to extend pause in its policy rate hikes especially in the context of increasing interest rates risk and credit risk.The fall in Indian 10 year bond yield is below 7 % which needs to be taken into account.Similarly reckless corporate lending without proper scrutiny of their credibility will definitely make Indian financial system more vulnerable.Otherwise it will continue to be more vibrant and robust.