New Delhi: The Reserve Bank of India (RBI) is now grappling with an unusual problem — people are too easily connected to their bank accounts, and are too dependent on social media for their news.
The concern is that, in times of a crisis at a particular financial institution, or even a rumour of one, depositors can vacuum out their money too quickly for regulators to respond to.
ThePrint has learnt that officials in the RBI have held at least two meetings so far, and have issued guidelines to financial institutions to check their internal system, to reduce the time it would take for them to react to sudden widespread withdrawals.
In addition, the RBI last month also issued a draft circular with guidelines to banks to maintain higher levels of liquid funds associated with deposits in accounts that are connected to internet banking, mobile banking, or the unified payments interface (UPI) system. According to bank officials, this would include nearly all bank accounts now.
One consequence of this heightened safety measure, however, is that it will reduce the funds available with banks to lend further, according to ratings agencies.
“If you see what happened in the Credit Suisse case, within six hours, nearly everything was withdrawn,” Sachin Chaturvedi, non-official director on the central board of the RBI, told ThePrint. “In the US, it took just 12 hours.”
“So, our discussion in the RBI was largely in terms of how much time it would take in India for such withdrawals to happen, and how much time it would take to block and check these,” he added.
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RBI isn’t the only one worried
The Credit Suisse case Chaturvedi was referring to was the March 2023 collapse of the bank, with it having to be bought by its main rival UBS. Notably, while Credit Suisse had some serious financial problems, the trigger for its collapse was a contagion effect from the collapse of Silicon Valley Bank (SVB) in the US.
The RBI is not the first to raise concerns about the highly-connected nature of bank accounts and the increased speed of bank runs. Following the collapse of SVB, the US Federal Reserve conducted a review of its supervision and regulation of the bank.
In the resultant report in April 2023, the vice-chairman for supervision, Michael S. Barr, highlighted the increased pace at which bank runs now take place.
“The combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,” Barr said. “Social media enabled depositors to instantly spread concerns about a bank run, and technology enabled immediate withdrawals of funding.”
The RBI has been discussing this issue over the last few months, Chaturvedi said.
“From that perspective, there were a couple of meetings and it was decided that we should reduce the response time, and we decided what checks would kick in at what point,” he explained. “We are well prepared from that perspective.”
“Some guidelines have been sent to the banks as well to check their internal processes, since not everything is in the RBI’s direct control,” he added.
The fear contagion and bank runs
According to Anil Gupta, senior vice president and co-group head of financial sector ratings at ICRA, there are a number of instances within India as well when the RBI has taken action against a bank and this has led to fear among depositors.
“Social media also has a significant role in creating panic,” Gupta explained. “For example, when SVB failed, one of the cooperative banks in India had to issue a clarification to its customers that it was not the impacted bank, since the customers were panicking. This is the challenge posed by enhanced ease of access.”
In March 2023, when SVB collapsed, the Mumbai-headquartered Shamrao Vithal Co-operative Bank (SVC) had to quickly issue a clarification that “SVC Bank is completely unrelated to Silicon Valley Bank that was based in California”.
“We request our members, customers and other stakeholders not to pay attention to baseless rumours and mischief-mongering by unscrupulous elements insinuating similarities in brand names,” it stated.
According to Chaturvedi, faith and trust are the two biggest casualties with the rise of social media, and the financial sector is one of the worst impacted.
“People are digitally connected and connected at multiple points with the bank, and withdrawals and transfers can happen within seconds, during off-hours or office hours,” he said. “That is a big challenge for banks.”
Banks to maintain higher buffers, at a cost
Last month, the RBI issued a draft circular in which it suggested that banks should set aside a higher amount as a buffer for accounts connected via internet or mobile. The new rules are to come into effect from 1 April, 2025.
“Banks shall assign an additional 5 percent run-off factor for retail deposits which are enabled with internet and mobile banking facilities, stable retail deposits enabled with IMB shall have 10 percent run-off factor and less stable deposits enabled with IMB shall have 15 percent run-off factor.
Run-off refers to the possibility of deposits getting withdrawn. So, now, for every Rs 100 in deposits linked via internet or mobile banking, banks will have to set aside Rs 10-15 as a buffer.
“Tighter liquidity norms are credit positive because they will help improve the resilience of banks against unexpected outflows of depositors,” Devang Rajkotia, analyst at Moody’s Ratings, said. “Strong adoption of digital banking has made banks’ funding vulnerable to sudden outflows of funding.”
However, Rajkotia also said banks will have to increase their holdings of high-quality liquid assets as a result of the proposed norms, which will mean they would have to cut back on their lending.
“We expect banks to taper credit growth ahead of the measure’s proposed implementation on 1 April next year, which will improve their credit to deposit ratios,” Rajkotia said.
(Edited by Nida Fatima Siddiqui)
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