As you know, the recent collapse of Silicon Valley Bank (SVB) and Signature Bank has sent shock waves across the global markets creating an atmosphere of uncertainty and panic. Billions of dollars have been wiped out of the global economy. Do you understand the role banks play in the global economy?

As one of the most trusted institutions of the financial world, a bank is responsible for regulating funds. It is a safe place for consumers and business owners to stow their cash and a source of loans for personal purchases and business ventures. In turn, the banks use the cash that is deposited to make loans and collect interest on them. Whenever a bank fails to fulfill any of its responsibilities, it is known as a bank failure. 

Why Do Banks Fail?

The most common cause of bank failure occurs when the value of the bank’s assets (receivables) falls to below the market value of the bank’s liabilities (payables), which are the bank's obligations to creditors and depositors. This might happen because the bank loses too much on its investments. Another reason for the same is undercapitalization when the bank does not have enough money to run its operations. 

A very famous instance of this is the Nirav Modi Scam. In this case, unauthorized LoUs (Letter of Undertaking) were given by corrupt PNB officials to Nirav Modi and his firm. These LoUs were given without any collateral as security and any sanctioned credit limit. To make matters worse, all these transactions were not added to the PNB’s Core Banking System (CBS) which is used for record-keeping purposes.

Tips to choose the right bank for you!

  • Traditionally, Indians have chosen their banks based on two factors: attractive interest rates on saving schemes, and proximity of the branch to their home. 

  • If you only have online official transactions of payment and receipts, you can just about open an online bank to fulfill your requirements

  • If you are a senior citizen and only looking for investments, an account in a public sector bank near you would be preferred as they offer slightly higher rates of interest on deposits and many government schemes beneficial for senior citizens.

  • If you’re trying to save more money, look for a bank that offers features to help you reach your goals, such as High-yield savings accounts

  • Not all online banks offer a smartphone app, which may require that you sign in to your account through a mobile browser. If you value the convenience of online or mobile banking, search for a bank that has a multi feature app that allows you to carry out transactions on the go. 

  • Private sector banks and best known for their customer service, friendly online user interfaces and relationship management with prompt services and lesser turnaround time for queries and resolutions.

What are the chances that this may happen in India too?

The RBI has put in place many safety nets to protect depositors

  • The central bank and the government have always made sure that a failing bank gets acquired before it drowns.

  • India’s external debt is within manageable levels

  • Bond portfolio - interest rates have not risen as much in India therefore less impact on India Banks bond portfolio.

  • Most of India bank deposits is from household savings

  • Indian banks have a high proportion of low-cost current account savings account deposits and high proportion of retail deposits , making them more resilient

  • India's ratio of foreign claim to domestic claims is also the least among countries, signifying that its banking and financial system is very disciplined

  • Current capital levels, healthy asset quality and strict monitoring by the regulator ensure minimum possibilities for Indian banks to go bust

How likely is it to impact your wealth?

As per the insurance program, cumulative bank deposits, which include fixed deposits, savings accounts, recurring deposits, and current accounts, are insured up to Rs 5,00,000 per bank and depositor in the event of bank failures.

In India, since the central bank and Government ensure that a failing bank gets acquired before it drowns, your money will always remain safe and replenished by the government, RBI or the bank that has taken over.