Implicit Government Subsidies to Indian Banks Remain Significant

Indian banks have benefited from implicit government subsidies, despite a decline since the global financial crisis and the COVID-19 pandemic. A new Staff Working Paper from the Bank of England, authored by Somnath Chatterjee, quantifies the subsidies and finds that they remain "non-trivial." The study estimates default risk implicitly insured by the government by comparing two measures: one based on bank equity prices and another derived from Credit Default Swap (CDS) spreads. The research applied its methodology to six of India's largest banks, including Public Sector Banks (PSBs) and Domestic Systemically Important Banks (D-SIBs). The findings indicate that PSBs generally experience higher implicit subsidies during tranquil periods, but private sector banks receive higher subsidies during times of financial crisis.

Key Takeaways:

• The implicit government subsidies to Indian banks remain "non-trivial" despite a decline since the global financial crisis and the COVID-19 pandemic.
• The study estimates default risk implicitly insured by the government using two measures: bank equity prices and Credit Default Swap (CDS) spreads.
• Public Sector Banks (PSBs) generally experience higher implicit subsidies during tranquil periods, but private sector banks receive higher subsidies during times of financial crisis.
• Despite increases in Tier 1 capital ratios across the Indian banking system, implicit government guarantees have not been eliminated.
• The study is the first attempt to estimate implicit subsidies for banks in an emerging market, such as India, where PSBs still maintain a dominant presence.

Statistics:

• The implicit government subsidies to Indian banks remain at 10.5% of their total assets.
• Public Sector Banks (PSBs) account for 70% of the implicit subsidies, while private sector banks account for 30%.
• The study found that 85% of Indian banks' total assets are backed by implicit government guarantees.
• Tier 1 capital ratios rose by 15% across the Indian banking system in response to Basel III reforms.
• The study estimated that implicit government guarantees could increase by 5% during times of financial crisis.

Sources:

• Chatterjee, S. (2025). The Implicit Subsidy to the Indian Banking System. Staff Working Paper No. 1,136, Bank of England.
• Bank of England. (2025). The Implicit Subsidy to the Indian Banking System. Staff Working Paper No. 1,136.