Explainer: What is Credit Suisse crisis all about and how will it impact India?

Zurich-headquartered Credit Suisse Group AG, which is the latest bank in news, is the second largest global investment bank and financial services firm in Switzerland. It is the 12th largest foreign bank in India, owning assets worth Rs 20,700 crore.

However, the firm has been in financial trouble over the past 2-3 years and has been questioned for submitting its audited financial statements. Some time last year, there were also talks of a possible merger of the bank with a peer bank, but did not bear fruit.

What Changed Now?
Earlier this week, the Swiss bank indicated “material weaknesses” in its financial reporting, leaving investors unclear about whether the lender would be able to get any financial rescue.

The troubles turned into a fully-blown crisis after reports said its largest investor, Saudi National Bank or SNB, ruled out more financial assistance to the bank, citing regulatory issues.

Further, the cost of insuring the bonds of Credit Suisse Group against default climbed to the highest on record. 5-year credit default swaps for the Zurich-based lender jumped as much as 36 basis points on Monday to 453 basis points, according to pricing source CMAQ.

Such a sharp surge indicates the credit stress for an entity, and this triggered massive sell-off in the stock. The stock plunged as much as 30% triggering a trading halt.

Is the Credit Suisse crisis as bad as the SVB collapse?
In the case of SVB, the crisis came out of nowhere and got blown into a systemic risk for the financial system. However, Credit Suisse’s financial troubles were not fully unknown.

The SVB and two other bank collapses in the US, though, triggered worries over the ability of banks with weak businesses being able to survive.

But the important thing to note is that Credit Suisse is much larger and more integrated with the global financial system compared to SVB.

Therefore, a meltdown of Credit Suisse can have a far reaching impact beyond the European continent.

Credit Suisse’s India Exposure

Even in the worst-case scenario of an SVB-like collapse, Credit Suisse is not being seen as a direct threat to India, as it owns just 0.1% of assets in the Indian banking system.

However, the Swiss banking giant has a presence in the derivatives market and funds 60% of its assets from borrowings, of which 96% has a tenure of up to two months, according to a study by Jefferies.

Given the relevance of Credit Suisse to India’s banking sector, analysts see softer adjustments in the assessment of counterparty risks, especially in the derivative market.

What Are Market Insiders Saying?
Brokerage Jefferies expects the RBI to keep a close watch on the liquidity issues, and counterparty exposures and intervene as necessary.

Nilesh Shah of Kotak Mahindra AMC believes that an SVB or Credit Suisse-like situation is unlikely in India given the stringent liquidity norms for the banking system.

India has implemented Basel-III norms for the banking system, and under this, banks have to maintain liquidity coverage ratio, which apparently was not being met in SVB cases.
In SVB’s case, as well as probably Credit Suisse’s case, there was a concentration of deposits from a particular region or from a particular kind of business.

But by and large, most of the banks in India have a fair amount of diversification, Shah said.

Further, there is a cap on how much banks can put into a held-to-maturity or HTM portfolio.

“We have sufficient rail guards to ensure that our banking system does not get derailed vis-a-vis what happened with the SVB kind of scenario,” Shah said.

Can Banking Crisis Have Spillover Effects on Other Sectors?
While the crisis at Credit Suisse or the banks in the US will not have any direct impact on the Indian banking system, it is likely to have some impact on the Indian information technology industry.

US and Europe are the biggest export markets for the Indian IT companies. Further, Banking and Financial Services or BFSI is one of the biggest revenue segments for largecap IT majors.

In FY22, BFSI contributed close to 40% of the consolidated turnover of Tata Consultancy Services. Infosys also receives around the same percentage of revenue from this segment.

A crisis in the banking sector, could therefore, cloud the business outlook for the IT services companies.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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