India may not be immune to an SVB, Credit Suisse-induced recession

Silicon Valley Bank (SVB) was closed by California bank regulators, making it the second largest bank failure since Washington Mutual in 2008. Image: Rebecca Noble / AFP
 
Nothing can be more lethal for any economy than the collapse of two large banks in two continents in such a short span of time. What the world fears is a snowballing of the crisis, just like the Asia financial crisis in 1997 or the Lehman Brothers failure that brought the world economy to a grinding halt following an economic recession.  
 
On March 10, Silicon Valley Bank (SVB) was closed by California bank regulators, making it the second largest bank failure since Washington Mutual in 2008. There was turbulence in Europe as well due to Credit Suisse, with its key shareholder refusing to provide additional support through infusion of capital.
 

While regulators have stepped in to bail out SVB, and UBS Group AG, Switzerland's largest banking group, has agreed to acquire the crisis-hit Credit Suisse Group AG in an unprecedented deal, investors are growing nervous of a financial contagion. As monetary tightening continues, investors fear the world economy may be rapidly sliding towards recession with the end of the easy money cycle making it riskier than ever before.
 
“Financial instability is fanning credit risk aversion globally and raising the likelihood of recessions in many economies, with one notable exception: China,” say Nomura analysts.  Although the analysts do not think there is any material fundamental impact on Asian stocks from US banking sector issues, there is always the risk of some “skeletons emerging from the closet”. They believe these issues will not be systemic to the health of the banking sector and continue to see medium-term value in Asian stocks.
 
Markets have been volatile since beginning of 2023 with slump in currencies and crude oil pushing investors to opt for asset classes other than just equity. Since January, Indian markets have been in a turmoil, declining around 5-6 percent while the US, China, Japan and Hong Kong have been volatile, but gaining.

Also read: SVB and Credit Suisse failure, and how it will affect your equity portfolio
 
Bond markets are also in a phase of extreme volatility around the banking crisis developments. “The yield curve has bull steepened by 60 basis points in a matter of days, something seen only a few times in history and usually the bond market’s way of saying recession risk is now more elevated. An inversion of the curve typically signals a recession within 12 months, but the real risk starts when it re-steepens from the trough,” says Michael J Wilson, equity strategist, Morgan Stanley.
 
Even after the banking crisis, the European Central Bank (ECB) further hiked the policy rates by 50 basis points on expected lines. With its rate hike action, the ECB has indicated that central banks around the world consider inflation as a much bigger issue while showing confidence in their banking system. Recent turmoil in the banking system of the US and EU raised questions on the ability of central banks to further tighten. However, ECB has signalled that it is ready to supply liquidity to banks if needed.   
 

How safe is India?

According to analysts at Jefferies, Credit Suisse is more relevant to India's financial system than SVB. Credit Suisse Bank has more than Rs 20,000 crore in assets and is 12th among foreign banks in India. It has presence in the derivatives market and funded 60 percent of assets from borrowings, of which 96 percent is up to two months, and 70 percent are in government securities (short term).
 
“Given the relevance of Credit Suisse to India's banking sector, we see softer adjustments in assessment of counter-party risks, especially in the derivative market. We expect the Reserve Bank of India (RBI) to keep a close watch on liquidity issues, counter-party exposures and intervene as necessary. This may also lead to institutional deposits moving more towards larger/quality banks,” say Prakhar Sharma and Vinayak Agarwal, analysts, Jefferies India.

Also see: Silicon Valley Bank: The rise and fall of tech industry's favourite finance house
 
Foreign banks have a relatively smaller presence in India with 6 percent share in total assets, 4 percent in loans and 5 percent in deposits. They are more active in the derivative markets (forex and interest rates) where they have a 50 percent share. Most of them are present as branches of the parent bank with only a few present as a wholly-owned subsidiary. Top five foreign banks in India by assets are HSBC, Citibank (has now sold consumer business to Axis), Standard Chartered, Deutsche Bank and JP Morgan.
 
Meanwhile, the clock is ticking for an impending recession with rate hikes risking financial instability. “The narrative around the certainty of the imminent recession became stronger; the prices of crude oil fell by a massive 11.9 percent in the last week as the markets expected a lower demand for crude oil in the event of a recession,” says Hitesh Suvarna, analyst, JM Financial Institutional Securities.
 
India is in the clutches of a money squeeze too—sluggish M2 growth (despite credit pick up), liquidity surplus dry, real rates rising and curve flattening. This portends a domestic demand downturn. If pressure on the rupee mounts, RBI’s forex defence may push system liquidity into deficit, warns Kapil Gupta, analyst, Nuvama Group.
 
However, Gupta thinks, overall, the SVB crisis is unlikely to result in a great financial crisis kind of financial instability, but it is sizeable enough to create volatility and shake confidence. “One must keep eyes on the broader picture, which is that monetary indicators are suggesting that Fed may have gone too far already,” Gupta adds.