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Govt tells PSBs to monitor, make provision for companies' pledged shares

Directs banks to double down on comprehensive stress testing of portfolios at micro-cluster level

Bank, Banks, foreign banks

Nikesh Singh

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The finance ministry has directed public sector banks (PSBs) to properly monitor and make provision for pledged shares of companies by integrating market data, as well as manage overall exposure to such companies that would enable them to take timely action.

The direction came during a meeting chaired by Finance Minister Nirmala Sitharaman on Saturday to review the performance of PSBs on several financial health parameters and determine their resilience in light of a global financial crisis arising from the collapse of some international banks in the US and Europe.

According to an official present at the meeting, the finance ministry directed PSBs to double down on comprehensive and granular stress testing of portfolios at a micro-cluster level.

“At present, only six of 12 PSBs conduct stress testing at micro-cluster level incorporating product-loan categories, demographic details, loan characteristics, among others, while no PSB has built comprehensive mature stress testing model in line with EASE 5.0 recommendations on the extent of historical data considered, number of scenarios, risk types considered, etc,” the official said.

The comprehensive stress testing would enable banks to consider risks from rising interest rates. In the case of Silicon Valley Bank, assets locked into long-term HTM bonds and a rise in withdrawals created an asset-liability mismatch.

The finance ministry, however, expressed confidence about the resilience of PSBs as they have a liquidity position well above regulatory requirements, diversified deposits, an asset base, and a robust regulatory framework. “Liquidity position of all PSBs is well above regulatory requirements. Unlike SVB, all Indian scheduled commercial banks and non-banking financial institutions are subject to liquidity coverage ratio and net stable funding ratio,” the official said.

The finance ministry also asked PSBs to focus on high-quality current account savings account (CASA) acquisition and retention as against bulk and certificates of deposit. It raised concern over the falling CASA market share of PSBs to 58 per cent in 2021-22 (FY22), from 70 per cent in 2013-14 (FY14) at a time when banking industry CASA increased to 45 per cent in FY22, from 34 per cent in FY14, the official said.

PSBs were instructed to increase the share of external benchmark-based lending rate-linked advances for effective transmission in the rate of interest and increase the implementation of risk-based pricing models.

The official said that the finance ministry also directed PSBs to create a crisis management playbook to manage narrative in the event of a crisis and focus on countering false messaging and speculation through social media and WhatsApp.

The finance ministry sees reduced profitability for PSBs in 2023-24 (FY24) due to higher provisioning. In a conservative case scenario, where there is a sustained increase in inflation and subsequent rise in policy rates by 25 basis points or above, the finance ministry expects a moderate to weak profitability outlook for Indian banks in FY24. However, in the base case scenario, when there is stability in inflation and interest rates, the Indian banking sector has a strong profitability outlook for FY24 with sustained high credit growth, continued fee income growth, and a downward trajectory of credit costs.

The official said the finance ministry also sees a contraction in net interest margin as yields may no longer outpace the increase in the cost of funds, as deposits begin to be upwardly priced.

The directives
  • Focus on high-quality current account and savings account acquisition and retention
  • Need of crisis playbook to pro-actively communicate with customers  in case of crisis
  • Increase the share of EBLR-linked advances
  • Strong liquidity position, diversified deposits and asset base, and a robust regulatory framework make PSBs resilient

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First Published: Mar 26 2023 | 8:27 PM IST

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