Indian banks have a strong case to not bear the brunt of Silicon Valley Bank collapse

The fallout from the collapse of Silicon Valley Bank that has spread fears across countries may not adversely hit Indian lenders banking on their strong asset liability management position, experts say.

Large reliance of Indian banks on local deposits cushions them as global peers are facing potential contagion from the woes emanating from SVB fallout, Macquarie Group told Bloomberg.

Indian banks are distinguished with “hardly any exposure directly or indirectly to SVB” amid all the “gloom and doom” in global banks, Macquarie analyst Suresh Ganapathy wrote in emailed comments. The sector has “a domestic deposit funded system with investments in Indian government securities,” he wrote.

The collapse of SVB has sent shockwaves across the worldwide tech ecosystem and investor community as the 40-year old bank collapsed in less than 72 hours. Friday’s dramatic failure of the SVB, which focuses on tech startups, was the biggest since the 2008 financial crisis. Moreover, state regulators closed New York-based Signature Bank on Sunday, making it the third largest failure in U.S. banking history.

“The collapse of SVB will not have any effect on the Indian banks as the Indian banking system is more insulated and regulated under the supervision of RBI,” Kranthi Bathini, Equity strategist at WealthMills Securities, had said earlier.

However, he said there will be some impact on the sentiment of the market in the short to medium term as it’s a global contagion, but will not affect Indian equity markets in the long term.

The US market’s three main stock indices fell between 1% and 2% on Friday in response to the news of SVB’s collapse and a resilient American jobs market. India’s indices had on Friday tumbled on worries the biggest US bank failure in nearly 15 years might have ripple effects around the world. The Indian equity markets opened marginally lower on Monday, but are now trading lower. Indian financial companies outperformed regional peers on Monday as Jefferies Financial Group echoed Macquarie’s outlook, Bloomberg said. The nation’s banking sector gauge rose as much as 0.6% before erasing gains, while the MSCI AC Asia Pacific Financials Index dropped as much as 1.3% to add to Friday’s 2.2% slump.

Macquarie, in a note on Friday, had retained the bullish outlook for Indian lenders, expecting a “goldilocks scenario” for the next two years due to strong asset quality.

“Despite concerns of a slowdown in loan growth and margin compression, the earnings upgrade cycle continues for the banking sector,” the analyst wrote, raising the sector’s earnings growth estimates by 3%-9% for the years through March 2025.

Jefferies also said SVB Financial Group poses “low potential risk” to India, as a subsidiary was sold in 2015 and a rebranded version of that company has “good credit rating and stable liquidity.”

Analyst Prakhar Sharma echoed his view on Monday, saying the nation’s banks are “well-placed” as more than 60% of deposits are household savings.

SVB’s collapse is a textbook case of Asset-Liability Mismatch – where lenders use short-term hot money to lock in money long term. With depositors fast pulling money out of the bank, it was trapped with several loss-making bonds and few liquid papers. This is reminiscent of what happened to the Indian mutual fund industry soon after the IL&FS crisis when various debt schemes invested short-term money into illiquid papers.