Why bank downgrades in the US fail to impact Indian banks?

In this week’s Current account episode, Hamsini Karthik is joined by Nilesh Shah, Founder and CEO of Envision Capital. The discussion centres around the recent market developments, particularly the impact on global markets due to bond downgrades in the US, contrasting with the stable situation in Indian banks.

The dialogue delves into the concept of interconnectedness among global banks. While some level of interconnectedness exists, it’s not as pronounced as it was during events like the Global Financial Crisis. The degree of interconnectedness often depends on the severity of the crisis and the potential impact on sentiment rather than just fundamentals.

Nilesh Shah discusses the robust performance of India banks in recent quarters. He emphasises that banks are well-capitalised, asset quality is strong, and there is demand for credit. Despite some challenges, such as increasing deposit costs and shifts in deposit types, banks are currently in a favourable position.

The conversation touches upon the Reserve Bank of India’s recent move to introduce incremental capital and its potential impact on net interest margins (NIMs). Nilesh Shah explains that while there might be a slight compression in NIMs due to rising deposit costs, the overall environment remains supportive.

Regarding investment prospects, Nilesh Shah cautions that the exponential gains witnessed in the past might not be replicated in the near future. He suggests that banks’ performance will be closely tied to loan book growth, credit cost management, and improvement in return metrics.

The discussion concludes on an optimistic note, highlighting the resilience of Indian banks and their ability to navigate challenges with the support of prudent regulations and central bank measures.

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