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 per cent 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.
The finance ministry in its review meeting held in March had told PSBs to manage the overall exposure to companies, inclusive of pledged shares, against the backdrop of a banking crisis in developed economies.
Canara Bank in its response to an email query said the top 10 corporate borrowers of the bank as on March 31, 2023 were either government-owned Maharatna or AAA/AA-rated companies where the credit risk premium was low. “It is the bank’s endeavour to grow the credit book between RAM (retail, agriculture and MSME) and corporate credit in a ratio of 55:45 to diversify credit/concentration risk,” it added.
A senior official of Punjab & Sind Bank said the bank’s top 10 borrowers were either government-guaranteed or high-rated companies. “Earlier, the bank was little skewed towards corporate loans, but now the bank is focussing on the RAM portfolio, after which automatically the concentration will become less,” the official said, requesting anonymity.
In an interview with Business Standard, PNB MD & CEO Atul Kumar Goel echoed similar views. “In the credit sector, RAM constitutes about 54 per cent of the total loan book. The bank is tactful when extending loans to new corporate accounts. Every month, the bank is watching the manner in which the underwriting standards are working. The bank is not compromising on asset quality and is focussing on increasing its turnover,” he added.
Queries sent to Bank of India and UCO Bank didn’t elicit any response till press time.
On July 11, RBI Governor Shaktikanta Das in a meeting with MDs & CEOs of commercial banks emphasised the need to pay special attention to strengthening governance and focus on the tripod of banking stability — compliance, risk management, and audit functions.
