Finance ministry asks PSBs to be wary of competition in deposits segment

Directive comes after the recent merger of HDFC Ltd with HDFC Bank

The finance ministry has apprised public sector banks (PSBs) of rising competition in the deposits segment in the aftermath of the recent merger of Housing Development Finance Corporation (HDFC Ltd) with HDFC Bank, which will now see home loan customers being tapped into by HDFC Bank for retail banking.

The directive came at a meeting chaired by Finance Minister Nirmala Sitharaman on Thursday where PSBs were asked to take swift action on fraud and wilful defaulters and build a strong internal audit framework with a focus on having robust risk management practices in place.

According to an official present at the meeting, the finance ministry flagged challenges for PSBs on their dwindling market share in total advances and current account savings account (CASA).

“They were advised to focus on high-yield advances, CASA acquisition, and strengthen the sources of fee income as avenues of profitable growth,” he added.

“PSBs have been asked to strengthen their underwriting norms by recalibrating their internal credit rating systems and risk reporting structure. The lenders were advised to leverage analytics to increase coverage of early warning signals which would help identify and reach out to high-risk borrowers,” added the official.

Sitharaman advised PSBs to ensure a fair and transparent recognition of non-performing assets (NPAs) in line with the extant guidelines of the Reserve Bank of India.

“Banks should periodically review the guidelines internally to ensure there is proper recognition and reporting of stressed assets,” Sitharaman said at the meeting.

The asset quality of PSBs has improved significantly, with gross NPAs at 4.97 per cent and net NPAs at 1.24 per cent as of March 2023.

The finance ministry observed that all major financial parameters like credit deployment, profitability, asset quality, and capital adequacy indicate that the performance of PSBs has significantly improved and they are adequately capitalised and resilient.

“Strengthened by high capital adequacy, clean balance sheets supported by a healthy provision coverage, and improved resilience, PSBs are well positioned to support the credit needs of the productive sectors of the growing economy,” the ministry added.

The finance minister advised banks to address associated business model risk with robust risk management practices and have efficient and optimum asset liability management.

Sitharaman noted that while the overall priority sector lending (PSL) has exceeded the mandated target, the PSL targets in the sub-categories should also be met, including agriculture, particularly small and marginal farmers and micro, small and medium enterprises (MSMEs).

Under PSL norms, banks need to lend 40 per cent of the adjusted net bank credit to sectors, such as agriculture, MSMEs, education, housing, renewable energy, including advances to the weaker sections of the economy.

“Ensure an increase in rural, agriculture, and sectoral credit to meet PSL norms and further ensure that PSL targets are achieved across sub-categories,” she added.

Sitharaman asked banks to lead a special campaign to ensure the onboarding of the PM SVANidhi beneficiaries on digital payment systems.

In action mode

Challenge to PSBs with increased competition for deposits due to HDFC merger 

PSBs told to take swift actions on fraud and willful defaulters cases

Strengthen underwriting norms, collections and recovery

Evolve to mitigate business risks emanating from FinTech and BigTech

Have strong internal audit framework and adhere to caveats of internal policies  

Note: According to the presentation reviewed by BS