How Do Bank Rescues In India Fare Versus The U.S.?

On Friday, the world found out that 40-year-old Silicon Valley Bank would be in receivership of the Federal Deposit Insurance Corporation. The California-based lender's downfall was charted in less than two days.

After spending an uncertain weekend from hell, the SVB depositors received calming news on Monday, when the US Treasury, Federal Reserve and FDIC announced a rescue plan. The joint statement by the three agencies stated that all SVB depositors (not just those insured by the FDIC) will have access to their funds from Monday, with taxpayers not taking any hits.

While protecting SVB's depositors, the American government also announced the close of New York-based Signature Bank, while assuring its depositors that their deposits would also be made fully available for withdrawal, if needed. The Fed also announced a $25-billion backstop for the failing banks to pay their depositors.

By all means, this was a quick turnaround for a bank rescue situation. One where words were followed up with swift action and due assurances given by the top office of the United States.

Along with the regulatory machinery working toward deposit protection, the U.S. president, too, condemned those responsible for the "mess" at SVB Bank, swearing to take them to task.

“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Joe Biden said in a televised speech on Monday.

The action was warranted also due to the fact that the crash of America's sixteenth largest bank had led to investors across the world going short on banks in their respective geographies. According to Bloomberg, global financial stocks had lost $465 billion in the wake of the SVB financial crisis as of Monday.

At home, the Reserve Bank of India is said to have started seeking information on exposures to startups, while the Indian Banks' Association is reportedly working on a startup support scheme, for those affected by the bank closures, Business Standard reported.

In a world where panic travels faster than most regulators can tie their shoe laces, a rapid response is key to maintain public trust in the banking system. In those terms, there are a few lessons from the SVB episode which could work exceedingly well in India.

But first some context. As of Feb. 21, there were 2,029 banks in India where deposits were insured. These include public sector banks, private banks, foreign banks, local area banks, regional rural banks and cooperative banks among others.

Of the Rs 165 lakh crore worth of deposits these banks held as of March 31, Rs 81 lakh crore were insured by the Deposit Insurance and Credit Guarantee Corporation. In comparison, the DICGC had funds worth Rs 1.47 lakh crore. While the amount of deposits covered under this insurance scheme account for only 46% of the total deposits, by number of depositor accounts, the coverage is at 98%.

The key difference in resolution comes up in the way the regulator and other agencies involved act in India.

The American agencies took a weekend to provide full access to depositors of SVB. In India, the DICGC's procedure states that depositors of a liquidated or reconstructed bank will have access to their 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 is dependent on the kind of resolution the bank is undergoing.

The specific timelines for deposit payout were formalised only in 2021 when the government amended the DICGC Act. But the reality of timely payout is not uniform across all lenders.

In the Yes Bank rescue plan of March 2020, depositors had to wait for around a fortnight before they could access their funds. A clutch of financial institutions backed the private lender with equity infusion, while the Reserve Bank of India provided a Rs 50,000 crore emergency liquidity window to pay depositors.

When it came to Punjab & Maharashtra Bank, which went down in 2019, the delays were even longer. After putting deposit withdrawal strictures in September 2019, the regulator came up with a draft resolution plan in November 2021, which was then finalised only in January 2022. It was only then that the depositors were able to access their fully insured deposits of up to Rs 5 lakh. For larger depositors, the repayment plan promises a 10-year-long payout process.

Could the DICGC be made to move faster than this? Obviously. Once the RBI has taken steps to put a commercial or cooperative bank under reconstruction or some regulatory strictures, it is inexplicable why the insured depositors need to wait at all. That too in the age where artificial intelligence and machine learning are becoming the norm in the financial services industry.

This is not to say that the Indian rescue situation is all bad.

Whenever fears about a lender's health are in question, the regulator has swiftly stepped in. At RBL Bank when the regulator appointed an additional director to the board in December 2021 after CEO Vishwavir Ahuja suddenly stepped down, it quickly released a statement assuring the public that the lender's financial health was satisfactory. Similarly, last month, when fears of a contagion in the banking system were rising due to the Adani Group, the RBI released a statement assuring everyone that Indian banks were healthy.

The RBI, along with support from the government and other agencies, is also working on a far stricter supervisory framework, which aims to nip the problems in the bud. Not only is the RBI ramping up its supervisory cadre, it is also deepening the kind of checks it performs on banks and non-bank finance companies to avoid institutional failure.

Faster measures post facto, not just statements, could help in further bolstering the faith that depositors have deposed in Indian banks.