Public-sector banks have become so large and enmeshed with other lenders and borrowers that threats to their solvency pose increasing risks to the country’s financial system. The Reserve Bank of India, in its Financial Stability Report published on Thursday, finds that the failure of the two largest net borrowers would wipe out 22.4 per cent of capital in the banking system. A year earlier, the industry would have lost 12.1 per cent of its capital. The central bank estimates that the sector would lose 34.7 per cent of its capital if the four most indebted banks fail. The banking system would have lost 19.9 per cent a year earlier. “The systemic importance of the large borrowers may have increased,” the central bank says. The report does not name the debtors but its figures show that state-owned banks, the largest net lenders in the interbank market, hold the most short-term debt among all financial intermediaries. They made up 51.2 per cent of all borrowing in March and 48 per cent in June.
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