India’s largest public and private sector banks — State Bank of India and ICICI Bank, respectively — have been declared Domestic Systemically Important Banks (D-SIBs). This nomenclature essentially reflects on these two banks’ importance and the role they play in the Indian economy. It also means that if either of these two banks defaults, the entire Indian economy and financial system will be badly impacted.
This is the first time Reserve Bank of India has designated any bank D-SIB. The bank aims to make it an annual exercise. For this year, it had planned to name 4–6 banks as D-SIBs but came out with only two.The Reserve Bank of India had released the framework of dealing with domestic SIBs in July 2014.
State Bank of India and ICICI Bank were selected on the basis of their systemic importance score, which is calculated as bank’s size as a percentage of annual gross domestic product (GDP). Those banks that exceed 2% of the GDP are classified as D-SIBs.
RBI has devised a 4-bucket formula to classify systemically important banks, with bucket 4 being the highest. SBI has been placed in bucket three while ICICI Bank in bucket one.
According to the framework, D-SIBs will be under more severe supervision vis-à-vis their impact on the financial system. The banks will have to meet the additional requirements of increasing their capital as a percentage of the risk-weighted assets, in the range of 0.2% to 0.8% depending on the category bucket. They have been given time until April 2019 for this exercise.
As on 30 June 2015, ICICI Bank’s Tier 1 capital was 12.26%, meaning the bank is already well past the regulatory requirements. Same is the case with SBI whose Tier 1 level is at 9.62%.