Poor biz models may have triggered crisis in US banks:RBI Governor

Governor Shaktikanta Das has said the Reserve Bank is having a closer look at domestic lenders’ business models as it feels that poor strategies can trigger a crisis. The Governor also said that the recent developments in the US, which has seen the implosion of lenders like Silicon Valley Bank and a rush to limit the contagion of stress across the system, may be because of poor business models.He added that Indian banks have been able to stay resilient and have not been impacted adversely by the “recent sparks of financial instability seen in some advanced economies” courtesy the work done in this aspect by RBI and the banks themselves.

“The recent developments in the US raise a question whether the business model of individual banks that have faced challenges whether the business models were right,” Das said. “The RBI has started looking at the business models of banks more closely … deficiencies (in it) can spark a crisis,” Das said, speaking at the inaugural global conference on financial resilience organised by the College of Supervisors in Mumbai on Thursday.

Business models can sometimes create risks in certain parts of the balance sheet of a bank which going forward can blow up into a bigger crisis, Das said. Recent events in the banking landscape of the US and Europe suggest that risks could crop up from segments of its balance sheet which might have been considered relatively safer, Das said, amid several analysts suggesting the implosion of Silicon Valley Bank was triggered by lapses on something as basic as asset liability mismatches. He urged the management and bank boards to continually assess the financial risks and focus on building up adequate capital and liquidity buffers even beyond the regulatory minimum for continued resilience and sustainable growth.

Das said financial resilience is closely linked to a bank’s business model and strategy, and added that among other aspects, RBI has prescribed capital and liquidity buffers, and also nudged the lenders to strengthen capital buffers in times of plenty availability like the Covid-19 crisis. The Governor apprised the audience that Indian banks have shown improvements in the quantum of stress and also capital buffers in the recent past.The gross non-performing assets ratio has decreased to 4.41 per cent as of December 2022, down from 5.8 per cent in March 2022 and 7.3 per cent in March 31, 2021. The overall capital adequacy was at 16.1 per cent for Indian banks in December 2022, he said, adding that it is much above minimum requirements.