Indian economy is one of the largest economies in the world. To cater to this, India needs to have a strong foundation of banking institutions. This can only be done by having a good banking infrastructure. There are a few important banks in India which cater to this need. These banks ensure that the Indian economy is smoothy run.
Important Banks in India
Indian banks have a strong influence on the economy of India. Post-1991, there have been many reforms that have changed the dynamics of Indian banking. This all the rise to a few other banks.
Thus, the Indian banking system sector is considered one of the most influential industries in the country. Further, in 2017, RBI declared SBI and ICICI banks as the domestic systemically important banks in India.
These banks are subjected to higher levels of supervision to prevent any sort of disruption in financial services in the day to day life.
What is a Systemically Important Bank?
These are the banks are termed as too big to fail. Because the failures of these banks will have nationwide repercussions and will affect many people.
So, the bank failure is a scenario in which the financial institutions are not able to pay its depositors or either fulfill the financial obligations of the people.
Thus, these banks are termed as TBTF i.e. too big to fail. Also, this perception of TBTF creates an expectation for the government to support these banks during the time of difficulty. Thus, these banks can enjoy certain advantages in the funding markets.
The reason that RBI chose these banks as D-SIBs is because of their size. Thus, there is a methodology that the RBI follows for choosing whether the banks are systemically important or not.
Further criteria to select these banks are sustainability, size, interconnectedness, and complexity. Some of the banks take into account factors like savings deposits, loans, commission, etc.
Thus, a bank is termed as inter-connected when it has borrowed or given the money to the other banks and financial institutions.
For the sustainability factor, the financial infrastructure is used to determine it. That is, the financial services that are provided by the bank can be easily replaced or not, is determined by this factor.
The final factor which is complexity is determined by the higher cost it incurs and time is taken to resolve the issue. Both of these factors are high than the complexity of the bank is high. So, RBI decided on the D-SIBs, based on these factors.
Learn more about the Structure of Banking in India here in detail.
The banks that have been selected by RBI has to follow a certain framework. The RBI issues framework to deal with these systematic important banks.
Every year in August it has to release a list of banks which has been designated as D-SIBs. This framework requires that D-SIBs are placed in the four buckets based on the systematic importance scores.
Based on their place in the bucket, there is also an additional common equity requirement that has to be applied to it. This is also mentioned in the framework. Below is the updated list of D-SIBs.
Q. What does S stands for in D-SIB?
A. Social B. Subsidy C. Systemically D. None of the above
Answer: C. Systemically
Q. Who suggested the need for domestic systemically important banks in India?
A. US federal reserve B. Basel committee C. Raghuram Rajan committee D.The RBI
Answer: D. The RBI