Amidst the collapse of mid-sized banks in the US and Europe, finance minister Nirmala Sitharaman on Saturday asked public sector banks (PSBs) in the country to remain watchful of the global developments and take measures to protect themselves against any financial shocks.
In a meeting with PSB chiefs in Delhi, she also asked them to work out strategies to attract more deposits, as the government has eliminated the ‘tax arbitrage’ that some debt instruments have enjoyed.
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Her comments come following the amendments to the Finance Bill, 2023, under which debt mutual funds, which invest up to 35% of their proceeds in equity shares of domestic firms, will no longer have the benefit of long-term capital gains. The move is expected to make bank deposits more attractive as both these instruments will now have the same tax treatment on maturity. Further, bank deposits would also have the additional advantage of fixed returns.
Bank credit has remained robust despite the rise in interest rates and grew by 15.7% year-on-year to Rs 18.36 trillion as on March 10 this year. Deposit growth has, however, lagged and risen by 10.3% to Rs 16.8 trillion in the period. Following the series of interest rate hikes by the RBI, deposit rates have risen as banks are becoming increasingly competitive among themselves to attract deposits in order to bridge the widening gap between credit and deposit growth and lower liquidity in the market.
In the review meeting with heads of public sector banks on Saturday, the finance minister emphasised on the preparedness in the wake of the global developments.
She also emphasised on adherence to the regulatory framework by focusing on risk management, diversification of deposits and assets base.
Managing directors and CEOs of the banks also informed the minister in the meeting that they follow the best corporate governance practices, adhere to regulatory norms, ensure prudent liquidity management, and continue to focus on having robust asset-liability and risk management. They said they remain vigilant about developments in the global banking sector and are taking steps to protect themselves from any potential financial shock.
“All the major financial parameters indicate stable and resilient PSBs with robust financial health,” the CEOs were quoted saying, in an official statement. Open discussions were held on the global scenario comprising the failure of the Silicon Valley Bank and the Signature Bank, along with issues leading to the crisis in Credit Suisse.
“The finance minister reviewed the exposure of PSBs to this developing and immediate external global financial stress from both the short and the long-term perspectives,” the statement said.
PSBs must look at business models closely to identify stress points, including concentration risks and adverse exposures, she said, adding that she also urged them to use this opportunity to frame detailed crisis management and communication strategies. The minister also advised lenders to remain vigilant about the interest rate risks and regularly undertake stress tests.
Before the meeting, the government had sought details of bond portfolios of the major public sector banks, including State Bank of India
While both the Reserve Bank of India and finance ministry officials have maintained that the country’s banking system is well protected and insulated from the recent global developments, there were concerns that the collapse of two US banks and the stressed sale of Credit Suisse to UBS could have a global contagion effect that may eventually impact Indian lenders too.
“Bank collapses in the US in the first half of March 2023 are rippling through the global financial markets. While the direct impact of this meltdown on economic activity could be limited, as it would appear at present, markets are bracing up for tighter financial conditions which could present a trade-off between financial stability concerns and the conduct of disinflationary monetary policy,” an article on the state of the economy in the RBI’s monthly bulletin for March had noted.
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However, with various reforms measures undertaken, Indian lenders are on a much stronger footing. According to official data, asset quality of public sector banks has improved significantly with gross non-performing assets declining to 5.53% by December 2022 from a peak of 14.6% in March 2018. Capital adequacy ratio of PSBs improved to 14.5% in December 2022 from 11.5% in March 2015. All public sector banks are now in profit with aggregate profit of Rs 66,543 crore in 2021-22 and Rs 70,167 crore in first nine months of the current fiscal.
The minister also highlighted that PSBs must leverage the full potential of branches opened in International Financial Services Centres in GIFT City Gujarat to identify international opportunities, including prospects related to Persons of Indian Origin (PIOs).
The meeting, which was the first such discussion after the presentation of the Union Budget 2023-24, also focussed on general banking issues and the finance minister also asked lenders to support credit needs of the growing economy and focus on credit outreach in states where the credit offtake is lower than the national average, especially in North-East and eastern parts of the country.
Lenders were also asked to increase brick and mortar banking presence in border and coastal areas and promote the Mahila Samman Bachat Patra announced in the Budget 2023-24 through special drives and campaigns.
The review meeting was also attended by Union minister of state for finance Bhagwat Kishanrao Karad and Vivek Joshi, secretary, department of financial services.