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Be vigilant against interest rate risks, Nirmala Sitharaman tells banks

Union Finance Minister Nirmala Sitharaman chairs a meeting to review the performance of Public Sector Banks in New Delhi on March 25, 2023. Photo: Twitter/@nsitharamanoffc via ANI

Union Finance Minister Nirmala Sitharaman chairs a meeting to review the performance of Public Sector Banks in New Delhi on March 25, 2023. Photo: Twitter/@nsitharamanoffc via ANI

Amid fears of contagion effects from banking crises in the U.S. and Europe, Finance Minister Nirmala Sitharaman has asked banks to remain vigilant about “interest rate risks” and undertake regular stress tests, even as public sector bankers assured her all possible steps are being taken to safeguard themselves from any potential financial shock.  

Ms. Sitharaman, chairing a review of public sector banks’ (PSBs) performance on March 25, also urged banks to try attracting more deposits now that the government has reduced “the tax arbitrage in some debt instruments”, hinting at the Finance Bill changes to strip some of the tax benefits that are available to debt mutual funds from April 1.

“An open discussion was held with the MDs and CEOs of PSBs on the global scenario comprising of the failure of of Silicon Valley Bank (SVB) and the Signature Bank (SB) along with issues leading to the crisis in Credit Suisse,” the Finance Ministry said in a statement, adding that Ms. Sitharaman reviewed banks’ “exposure” to this “developing and immediate external global financial stress from both the short and the long-term perspectives”.

Business Matters | SVB collapse: Will U.S’s bank failures, bailouts affect India?

Ms. Sitharaman’s plea to bankers to be watchful of “interest rate risks” assumes significance as the rising interest rate cycle being pursued by central banks across the world to rein in inflation has led to some of the pressures on banks like SVB as the value of their older bond holdings has dipped.

The Reserve Bank of India (RBI), which has also been hiking rates since May 2022, is scheduled to review its monetary policy over a three-day meeting of the Monetary Policy Committee (MPC), starting April 3. Industry captains have urged the central bank to pause rate hikes as inflation has subsided to some extent and growth impulses in the economy are fragile and warrant greater support.

The Finance Minister urged PSBs to look closely at their business models to identify stress points, including concentration risks and adverse exposures, and urged them to “use this opportunity to frame detailed crisis management and communication strategies”. Ms. Sitharaman emphasised on preparedness along with due diligence through adherence to the regulatory framework by focusing on risk management, diversification of deposits and assets base.

Bank chiefs, on their part, conveyed that they follow best corporate governance practices, adhere to regulatory norms, ensure prudent liquidity management and continue to focus on having robust asset-liability and risk management, as per the statement. They asserted that “all the major financial parameters indicate stable and resilient” banks with “robust financial health”.  

Apart from assessing the resilience of Indian banks in the context of the global scenario of bank failures, Ms. Sitharaman also discussed the country’s general banking situation and advised banks to “pivot their strengthened financial position” to support the growing economy’s credit needs.

The Minister also asked banks to “take focused steps to attract the deposits given the steps taken by the Government to reduce the tax arbitrage in some debt instruments”. She also nudged them to increase their branch presence in border and coastal areas, while expanding credit access to States with lower offtake of loans, especially in the country’s northeast and eastern parts.

The Minister asked banks to undertake special drives and campaigns to help people invest in the Mahila Samman Bachat Patra (Savings Certificate) announced in the Budget 2023-24. The new small savings option, offered till March 2025, allows investments of up to ₹2 lakh in the name of women or girls for a two-year period and offers a fixed 7.5% return with a partial withdrawal facility.

Banks were also advised to enhance their business presence in new areas like One District One Product, e-National Agriculture Market and drones. Minister of State for Finance Bhagwat Kishanrao Karad and Department of Financial Services Secretary Vivek Joshi also participated in the review.  


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