These 3 Banks are the most important Banks in India: RBI D-SIB

The Reserve Bank of India (RBI) has designated State Bank of India (SBI), HDFC Bank, and ICICI Bank as Domestic Systemically Important Banks (D-SIBs). This status means these banks are essential to the stability of India’s financial system. If any of these banks encounter significant financial issues, it could disrupt the entire financial system

What Being a D-SIB Means for These Banks

As D-SIBs, these banks must maintain extra capital to stay financially stable. This includes additional Common Equity Tier 1 (CET1) capital, which acts as a protective buffer. For 2024, the RBI has set the following CET1 requirements:

• SBI: 0.80% of risk-weighted assets.
• HDFC Bank: 0.40% of risk-weighted assets.
• ICICI Bank: 0.20% of risk-weighted assets.

These requirements help ensure that D-SIBs have enough capital to remain resilient. For SBI and HDFC Bank, these requirements will further increase starting April 1, 2025.

Impact on Loan Requirements

With these increased requirements, D-SIBs need to set aside more capital when issuing loans. Starting in 2026, for example:

• SBI will need to set aside 12.3% of each loan amount as capital, up from the current 12.1%.
• HDFC Bank will need to set aside 11.9%, up from 11.7%.

Criteria for D-SIB Status

The RBI uses specific criteria to identify D-SIBs, including:

• Size: The total assets and reach of the bank.
• Interconnectedness: The bank’s connections to other financial institutions.
• Substitutability: The bank’s unique role in essential services, such as payment processing.
• Complexity: The range and sophistication of its operations.

Risks and Benefits of D-SIB Status

Being identified as “too big to fail” (TBTF) gives D-SIBs certain advantages. Since the market expects government support in case of trouble, D-SIBs find it easier to secure funding. However, this also raises some risks. The expectation of government support may encourage riskier behaviors, reduce market discipline, and create competition issues.

To address these challenges, the RBI has imposed additional capital and regulatory measures on D-SIBs. These measures aim to protect India’s financial system by ensuring D-SIBs maintain a stable position.

RBI’s Policy on D-SIBs

In its “Framework for Dealing with D-SIBs,” the RBI outlines that while these banks benefit from government backing during crises, they must follow stricter regulations to manage potential risks. This framework helps maintain the stability of D-SIBs and addresses the challenges of being “too big to fail,” ensuring a secure financial environment in India.