Are foreign banks in India safe?

This question is about the safety of foreign banks operating in India. I don’t know how much people who are not familiar with Indian finance will be able to tell me, but I think it is on topic for the site.

I’ll first give some background to set the question in context. India
has, roughly speaking, four classes of banks. These are
government-owned Indian banks, private Indian banks, cooperative
Indian banks, and foreign banks with branches in India. For
simplicity, and because it doesn’t really matter for the purpose of
this discussion, I’m lumping government owned foreign banks and
private foreign banks together.

Like many things in India, the Indian banking system is not exactly
functional. In particular, the deposit insurance per account was,
until recently, Rs. 100,000 (one lakh). Which is roughly equal to USD
1,306 at current exchange rates. It was recently increased to 5 lakhs
(approx USD 6,532) because of the PMC bank collapse. More about PMC in
a bit. 5 lakhs is not a lot of money even in India. The upshot is that
India does not have adequate deposit insurance, which leaves
depositors wide open to the consequences of bank collapses and the
like.

Another relevant thing to note is that the Reserve Bank of India (RBI)
has a list of Too Big To Fail banks, which last I checked, includes
SBI (the largest govt bank), and HDFC and ICICI (the two largest
private banks). So, for this reason, as well as others, these banks
are probably as safe anything in India. For reference,
This is
a reasonably current list of the largest Indian banks.

Also, the general stability of the Indian banking system is unclear,
but may be deteriorating. I’m not sufficiently knowledgable on the
topic to venture an assessment.

Of these four categories, government-owned Indian banks are almost
certainly the safest, in the sense that a government-owned Indian
banks is very unlikely to collapse. I believe such a thing has never
happened in the history of independent India. Not because they are
well run, because they are often not. It’s because if they run into
trouble, the govt bails them out with taxpayer money, often in
secret. However, government-owned Indian banks are not a great
choice. They have staggeringly bad customer service, and are really
unpleasant to deal with, which is a significant problem.

Secondly, there are private Indian banks. It’s not clear whether these
are safe, but it seems that the Indian govt has intervened to bail
them out in the past, at least if they are large enough. A recent
example is Yes Bank in 2020.

Thirdly, there are cooperative banks. These are a specifically Indian
thing. They superficially resemble community banks, like co-ops or
credit unions, but are not. They are very definitely not safe, and in
a safe banking system would not exist in their current form. Most
Indian banks are cooperative banks. They are fairly small, and there
are many of them. I was not aware of this until recently, but many
cooperative banks fail, and apparently nobody notices or cares. Mostly
it doesn’t even make the news. Commonly, what happens is that the RBI
freezes the bank in a sort of zombie state, and the bank can remain in
that state for many years. On 23 September 2019, one of the largest
cooperative banks in India (137 branches across India), Punjab and
Maharashtra Cooperative Bank, unexpectedly collapsed, leaving several
hundred thousand people (numbers are unclear), without their
money. This happened because the management was committing major fraud
for years and hiding it from oversight, including the oversight of the
RBI. Then someone blew the whistle, and the RBI shut it down. The
current situation is that depositors can withdraw at most Rs. 50,000
of their own money, plus a bit more if they can justify an
emergency. And other than some occasional reassuring noises from the
Reserve Bank, the govt has otherwise ignored the situation. This is as
horrific as it sounds.

The final category is what my question is about. If a foreign bank has
branches in India, it’s not clear to me how safe those branches would
be to bank in. Some example of foreign banks that have a significant
presence in India are Standard Chartered, Citibank, and HSBC. I have
and have had accounts in various private banks in the past. It’s a
relatively popular option in my location, though not in India at
large. I’m now wondering if this is safe. Each of Standard Chartered,
Citibank, and HSBC are very large banks in their own right, and I
think they are safe, in that they are so large that they would be
likely to be bailed out for the usual “too big too fail” reason. But
this may not apply to their presence in India.

Foreign banks in India offer the same deposit insurance as all other
Indian banks do, even though they will often offer much higher
insurance levels in other countries. This may be a condition of the
RBI allowing them to offer banking services in India. Obviously, it’s
hard to know whether these banks would offer higher insurance levels
if they could. If they did, they would automatically be a preferred
choice, of course.

I haven’t investigated this closely, and I’m not sure I’d understand
what I read correctly if I did, but it seems like the branches of
foreign banks in India behave like a distinct entity in some
respects. I’ve seen the term “subsidiary” used. So, I am wondering if
such a subsidiary bank ran into serious trouble, like a major fraud,
and was unable to repay its depositors, what would happen. Is the
parent bank legally liable, or could it wash its hands of the matter
with impunity? And if so, would there be anything the depositors could
do? There are certainly precedents of corporations withdrawing from
India when they ran into trouble, and leaving a mess behind. However,
I know of no foreign bank failing in India and abandoning its
depositors.

The bottom line is – are foreign banks in India best avoided if one is
concerned with safety? It’s hard to know how paranoid to be, but it’s
also clear that a bank system that does not have a safety net is not
one where one can take safety for granted.

Even though each of the parent banks in my three examples are very
large, in each case their presence in India, if considered as a
separate bank, is quite small. I haven’t run the numbers carefully,
but for example Standard Chartered Bank India appears to be comparable
in size to PMC in terms of assets. And SC may have a larger Indian
presence than Citibank or HSBC. And it’s clear in the absence of a
safety net, that ones best defense lies in keeping ones money in as
large a bank as possible.

I’m looking for information rather than speculations. Both the law in
this case (if it exists), and precedents (if known), would be relevant
and helpful. Even precedents in other countries; i.e. not India, might
be useful. And precedents in related businesses, as well.