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Finmin flags concentration risks at 5 PSBs
July 28, 2023
The finance ministry has cautioned five of the 12 public sector banks (PSBs) about the risk of credit concentration and asked them to ensure a well-diversified credit portfolio to reduce exposure to any particular group or industry.
During the 2022-23 (FY23) performance review of PSBs earlier this month, the ministry highlighted that the top 10 borrowers in the case of Bank of India, Canara Bank, Punjab National Bank, Punjab & Sind Bank, and UCO Bank constituted more than 10 percent of their total outstanding credit as on March 31, 2023.
Doing a scenario analysis, the ministry examined the risk-to-capital adequacy ratio of the five PSBs that might occur in case the top three borrowers or the largest group borrower defaults.
“This is part of the risk management exercise followed by the finance ministry to ensure that effective internal policies are in place in PSBs to avoid any risks emanating from such concentration,” a senior banking official told Business Standard.
Veena Sivaramakrishnan, partner, and head of banking & finance practice at Shardul Amarchand Mangaldas, said the Reserve Bank of India (RBI) norms relating to large exposure framework, single borrower limits, and group borrower limits aim to curtail any overexposure and credit concentration risks. “As these risks have a direct and significant impact on the health of a bank, they need to be reviewed periodically to ensure no misuse. Against the backdrop of global news relating to bank failures, the Ministry of finance’s observation appears to be timely,” she added.
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