In recent days, the collapse of a major American bank, Silicon Valley Bank, has had a cascading effect on other financial institutions, such as Signature Bank, with concerns growing about potential failures of other banks in the queue, including First Republic Bank. This turn of events has sparked discussions among economists and financial tycoons regarding the stability of the banking sector, not only in the United States but also in Europe. Amidst these concerns, there have been queries on the health of the Indian banking system. While it is important to note that each banking system is unique and may face distinct challenges, Indian banks have undergone significant reforms in recent years, including the recapitalization of public sector banks, strengthening of regulatory frameworks, and the introduction of new technologies. These initiatives have boosted the resilience and stability of the Indian banking sector, which has been well-recognized by international agencies. However, it is critical for Indian banks to remain vigilant and proactive in addressing emerging challenges to sustain their progress and ensure the soundness of the banking system.

The COVID-19 pandemic had a profound impact on the global economy, leading central banks of various countries to lower their repo rates to mitigate its impact. However, the resulting inflation became a primary concern for the world, prompting central banks to raise repo rates again, which in turn led to the collapse of some banking systems. In contrast, the Indian central bank, the Reserve Bank of India (RBI), painted a different picture altogether. The RBI timely increased its repo rates and implemented policies that differed significantly from those of western central banks. The RBI’s approach was based on the principle of gradualism and the importance of maintaining a balance between growth and inflation. This strategy helped to ensure that the Indian banking system remained stable, even during periods of economic volatility. The RBI’s efforts were well-recognized, with many international agencies praising its proactive approach in managing the impact of the pandemic on the Indian economy. It is worth noting that the RBI’s policies have evolved over time, and it continues to undertake reforms to strengthen the Indian banking system further.

One of the key differences between Indian banks and western banks, particularly in the USA, is the source of the money held by these banks. While western banks primarily hold the money of corporations, Indian banks hold a significant proportion of household savings. This difference in the source of funds can impact the stability of banks during times of crisis, such as bank runs. While it is not to say that Indian banks are immune to such problems, the probability of bank runs is lower due to the wide use of the Unified Payments Interface (UPI) system in India. This system, which requires a bank account, is widely used by the Indian population, particularly in cashless transactions. In the event of a bank run, individuals can easily switch to another bank account, which remains under the control of the RBI. The RBI’s ability to manage banks by injecting capital ensures that banks recover quickly from any financial crises, thereby restoring public confidence in the banking system. Therefore, the Indian banking system’s emphasis on household savings and the use of innovative technologies such as UPI have significantly contributed to its stability, especially during difficult economic times.

The Indian banking system’s emphasis on household savings and the Central Bank’s policies have helped maintain its stability, even during times of economic crises. In contrast, western banks primarily hold large amounts of funds from corporations. During times of financial turmoil, these banks are at a greater risk of losing a significant portion of their funds, making it difficult to control the situation. In contrast, the RBI has implemented policies such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to ensure that banks maintain sufficient reserves to manage any financial crisis. These policies have helped the Indian banking system to remain relatively safe and secure, with the RBI holding control over all banks in India. In comparison, western central banks often delegate significant powers to individual banks, leading to a lack of control and oversight. This lack of control can result in a shortage of liquidity, particularly during times of crisis. By holding all banks under its purview, the RBI can manage funds, invest and give loans within prescribed limits, and ensure that banks maintain adequate reserves. These policies and regulations have made the Indian banking system more stable, reliable, and resilient in times of financial stress, ultimately leading to greater confidence among customers and investors alike.

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17 thoughts on ““The Stability of Indian Banking System in Comparison to Western Banks””
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