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Risks in Private Banks

The RBI on Monday added HDFC Bank to the list of systemically important banks, or banks that are considered too big to fail. The other banks on the list are the two largest lenders-SBI and ICICI Bank. Since 2015, the central bank has been identifying banks whose failure would impact the whole financial system.These banks are subject to more rigorous regulation and capital requirement.

HDFC Banks inclusion in this category means that the bank would need to adhere to higher capital requirements. The positive side of being recognized as a systemically important bank is that investors would feel more secure in parking bulk funds in these institutions as they are too big to fail. For the purpose of additional capital requirement, additional capital requirement, the RBI categorizes banks into five buckets based on the size with capital requirement increasing progressively for each bucket. ICICI Bank and HDFC Bank are in the first bucket, requiring an additional tier I capital of 0.1% of risk-weighted assets (loans for FY18 and additional 0.15% from April 2018. SBI, being a much bigger bank, requires additional tier I capital of 0.3% of its loans with additional requirement of 0.45% from April 2018.

September 2017