RBI picks two private banks as safest, alongside SBI

The Reserve Bank of India (RBI) has officially recognised State Bank of India (SBI), HDFC Bank, and ICICI Bank as the country’s most systemically important financial institutions for 2024. This designation, known as Domestic Systemically Important Banks (D-SIBs), reflects the critical role these banks play in the Indian economy. These institutions are considered too large and significant to fail, and their collapse would have serious consequences for the financial system. As such, the government and financial regulators take extra measures to ensure their stability.

The D-SIB status is based on data available up until March 31, 2024, and is reviewed annually. Banks that receive this designation are required to maintain a higher level of capital to absorb potential losses and manage risks effectively. This is particularly important in times of financial stress, as it helps ensure the stability of the entire banking sector. The capital requirement for these banks is measured by the Common Equity Tier 1 (CET1) ratio, a key indicator of a bank's financial strength.

The CET1 requirement explained

For 2024, the three D-SIBs—SBI, HDFC Bank, and ICICI Bank—have been placed in different “buckets” based on their size and systemic importance. State Bank of India (SBI) has been placed in Bucket 4, meaning it is required to hold an additional 0.80% in CET1 capital. HDFC Bank, which is in Bucket 2, must maintain an extra 0.40% CET1 capital, while ICICI Bank, in Bucket 1, has the lowest additional requirement at 0.20%. These higher capital requirements are designed to ensure that these banks remain resilient in the face of economic challenges, without jeopardising the stability of the financial system.

Role in Indian economy

The concept of D-SIBs was introduced by the RBI in 2014 as part of a global effort to strengthen financial stability following the global financial crisis. The first bank to be designated a D-SIB was SBI in 2015, followed by ICICI Bank in 2016 and HDFC Bank in 2017. This classification is not only based on the size of the banks but also on their interconnectedness with the broader financial system and their importance to the economy.

The additional CET1 capital requirements for these D-SIBs will come into effect on April 1, 2025. The aim is to ensure that these banks have a sufficient buffer to withstand any financial shocks, protecting both the banks themselves and the wider economy. By maintaining higher levels of capital, these banks are better equipped to continue providing essential financial services even during periods of economic uncertainty.