According to State Bank of India ’s economic research report ‘Ecowrap’, foreign claims on India are way less than in countries like UK and US, limiting the country’s exposure to the global uncertainties.
The findings come just days after RBI governor Shaktikanta Das said that India’s banking system continues to be stable and resilient amid the recent turmoil in the sector globally.
It also comes in the backdrop of the high-profile acquisition of Credit Suisse by its rival UBS on Sunday.
The report also carried out an analysis of smaller bank deposits in India and US and found that domestic bank deposits are far better protected compared to the ones at American lenders.
Here are the highlights of the report …
‘India has least foreign claims’
Calling Indian banking system an “epitome of resiliance”, the report said that foreign claims on India are $104.2 billion on immediate counterparty basis and $81.5 billion as guarantor basis.
“When compared with other major countries, India has least foreign claims, both as counterparty basis, and also as guarantor basis,” it said.
Immediate counterparty basis means the methodology whereby positions are allocated to the primary party to a contract whereas guarantor basis meant methodology whereby positions are allocated to a third party that has contracted to assume the debts or obligations of the primary party if that party fails to perform.
According to World Bank, foreign claims are defined as the sum of cross-border claims plus foreign offices’ local claims in all currencies.
US has the highest foreign claims with $4,345 billion on immediate counterparty basis and $4,296.3 billion as guarantor basis. Meanwhile, UK is the second-most foreign exposed country after US with foreign claims of $4,039.3 billion on immediate counterparty basis and $4,032.1 billion as guarantor basis.
It said that India’s ratio of foreign claim to domestic claims is also the least among countries, signifying that its banking and financial system are very disciplined.
It added that no international balance sheet contagion can start from India.
Furthermore, the report said that out of $104.2 billion immediate counterparty foreign claims on India, $26 billion is in local currency.
Out of the remaining $78.1 billions, $59 Billion has to be paid in one year (by September 23), $3.6 billion has maturity of one to two years, and only $14.9 billion has maturity of over two years.
“Maturity wise … international claims on India are the least among major countries,” the report said.
Bank deposits: India vs US
The research by SBI said that US smaller bank deposits are insured in the range of 30-45 per cent only while in contrast, smaller bank deposits in India such as regional rural banks , cooperative banks, and local area banks are better protected at 82.9 per cent, 66.5 per cent, and 76.4 per cent respectively.
An analysis of insured customer deposits across multiple geographies initiated in the wake of bank runs across developed economies revealed US’s top 10 banks deposits are insured in the range of 38.4-66 per cent, according to the report.
Another interesting trend that has been observed in the US is that top banks’ deposits, on an average, have been insured to the tune of around 50-55 per cent, but their smaller Banks deposits are insured in the range of 30-45% only.
In contrast, the smaller banks in India are better protected, it said.
‘ECB rate hike counter-intuitive’
The report noted that the recent rise in policy rate of 50 bps by European Central Bank (ECB) could not have been more counter-intuitive, coming amid the mayhem that sparked a massive sell-off in the pack of banks, including systemically important banks from the European Union (EU) and the United Kingdom (UK), eroding $60 billion in a single day on March 15 alone.
The research added, however, if history had any rear-view mirror, the quantum of unsynchronised rate decisions by ECB in the last 25 years pre- and post -the global financial crisis (GFC) is looking grossly mis-timed.
“We feel the fissures of the present shock, after a year of war and three years of the pandemic, may prove to be quite a costly affair for the health of beleaguered European banking system going forward even as ECB continues branding Euro area banking sector as resilient, with strong capital and liquidity positons, as on September 2022, not factoring the rise in borrowing costs and the resultant decline in demand, along with tighter credit standards, all leading to a vortex,” SBI group chief economic adviser Soumya Kanti Ghosh said.
The research also said separately, the short-term borrowing like uninsured deposits by First Republic Bank, of $30 billion from a suite of 11 different US-based banks, for an ultra-short term period of 90 days, is shortsighted if we compare such packages in India in 2008 and 2020 when the consortium of banks or champion banks handheld the ailing banks for a multiyear period.