Are Indian Banks safe?

Well, last week we did a deep dive on Silicon Valley Bank and tried understanding what happened and what went wrong.

In case you were not able to read it, let me not make you feel bad by saying that it was read by people working in World Bank, Goldman Sachs, 2 Hedge Funds in USA (who are not short on Indian markets) and a large domestic institutional investor controlling 15% of DII activity in India.

Don’t feel too bad, here’s the link:

If you remember almost 45 days ago, Credit Suisse was refusing to accept Adani Bonds as collateral marking the paper down to 0 - only now the bank is about to go belly up. Stock was already down 40% in the last 6 months, it ended 64% down as on 16th March, 2023

Indian Banks are actually in a very sweet spot at the moment.

One one end the system wide NPAs are at an all time low and on the other end, provision coverage ratio is at an all time high.

Banks work on ROE - Return on Equity

Two things here - Return and Equity

Return can be optimised by charging higher interest to bad credit worthy customers (which also increases risk leading to lower profits and low ROEs) or lend optimally while ensuring that Equity is well capitalised

Equity often gets overshadowed if leverage is unnecessarily increased

A set of banks in India are 8 times levered - meaning for every 1 rupees of equity, there is 8 rupees of debt

On the other hand another set of banks are 16 times levered

No ice-creams for guessing which set of banks are in Category A (average leverage of 8 times) and which ones are in Category B

Both Jeffries and Macquarie have done a decent deep dive on stress testing Indian banking and describing the state of affairs.

TL:DR; Nai hoga bank run

The original reports can be accessed below.

Get Access to the original reports here: