This is part of increased vigilance amid turmoil in the US and Europe as depositors fret over banks’ health, they said.
Public sector banks (PSBs) assured finance minister Nirmala Sitharaman at a review meeting on Saturday that the Indian banking system remains robust and there is no cause for worry.
PSBs will also share information on provisioning made for pledged shares along with strategies to integrate market data of such securities. This mechanism will send out alerts enabling banks to take timely action and steps to manage overall exposure to a corporate, inclusive of lending through pledged shares.
Sitharaman has also directed the banks to continue to focus on diversifying asset and liability bases, said one of the persons. “Lenders will share more details with the government on these lines in the next two weeks,” said a senior bank executive aware of the developments.
The government also wants the banks to further strengthen their comprehensive and granular stress testing, which should include data at the micro-cluster level, incorporating product-loan categories.
Lenders are further expected to share details on crisis response playbooks to ensure a transparent narrative in the event of a crisis and the strategy for countering false messaging and speculation through social media.A detailed presentation was made before Sitharaman at the meeting highlighting how key bank parameters remained healthy, including non-performing assets, capital adequacy ratio, and net interest margin.
The banks pointed out that Indian banks may not face a situation similar to that of Silicon Valley Bank (SVB), one of the US banks that was forced to shut. The Reserve Bank of India is more conservative than US regulators when it comes to treasury operations and has prescribed countercyclical macroprudential tools such as an Investment Fluctuation Reserve (IFR), they said. Moreover, banks’ asset books comprise mostly loans and not bonds and their liquidity position is comfortable.
The crisis in the US has arisen largely from the sharp rise in interest rates that has caused large mark-to-market losses in banks’ bond portfolios. Three US banks have collapsed as worried depositors have pulled out funds.
State-run banks outlined the challenges they face in their presentation. Record profits expected in FY23 may not continue in FY24. Sustained high inflation may erode profitability on account of reduced credit demand, and other non-interest income may be impacted due to slower growth.
Additionally, banks may have to step up mark-to-market provisioning on their bond portfolios. Slower deposit growth, even as credit rises at the fastest rate in a decade, is also a concern.
“We presented two scenarios – one where inflation is stable and high credit growth is sustained, which will lead to a strong profitability,” said another bank executive.
The other scenario is where inflation is high and interest rates are hiked a quarter percentage point or higher. In that case, credit costs will increase and banks will be posting moderate or lower profits, he said.
