The direction came during a meeting chaired by finance minister Nirmala Sitharaman on Saturday to review the performance of PSBs on various financial health parameters, and to gauge the resilience of PSBs in light of the current global financial scenario emanating from the collapse of some international banks in the US and Europe.
The comprehensive stress testing would enable banks to consider risks from rising interest rates resulting in unrealised losses in held-to-maturity (HTM) portfolios. In the case of (Silicon Valley Bank) SVB, assets locked in long-term HTM bonds and increase in withdrawals created an asset liability mismatch.
The finance ministry also asked PSBs to focus on high quality current account and savings account (CASA) acquisition and retention as against bulk and Certificate of Deposits (CDs).
The PSBs were instructed to increase the share of External Benchmark Based Lending Rate (EBLR) linked advances for effective transmission in rate of interest and increase the implementation of risk-based pricing models.
The finance ministry sees reduced profitability for PSBs in the upcoming financial year due to higher provisioning. In 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 the FY24 with sustained high credit growth, continued fee income growth and downward trajectory of credit costs.
The official said the finance ministry also sees contraction in Net Interest Margin (NIM) as yields may no longer outpace increase in cost of funds, as deposits begin to be upwardly priced.