India Asks State-Run Banks to Conduct More Robust Stress Tests

India has asked state-owned banks to focus on their stress testing methods after they were found to have fallen behind on developing models that are meant to ward off risks of failure.

(Bloomberg) — India has asked state-owned banks to focus on their stress testing methods after they were found to have fallen behind on developing models that are meant to ward off risks of failure.

The matter was reviewed at a March 25 meeting of the bank leaders with Finance Minister Nirmala Sitharaman, who met to discuss progress of a reform agenda for the lenders, according to officials familiar with the matter.

Sitharaman in June announced that banks would come up with stress-testing models that would help them respond to customer needs and competition.

None of the 12 lenders, referred to as public sector banks, have built comprehensive stress testing models on scenarios in line with recommendations, the officials said, declining to be identified as the meeting was private.

The firms have not implemented models, which include more than 1,000 scenarios such as the extent of historical data, number of risk types and rare events, they said.

A finance ministry spokesperson did not respond to an email seeking comment.

So far, only one bank incorporated more than 30 macro indicators, including the gross domestic product, into its model, while only half of the banks were conducting stress testing at micro-cluster level, which took into account product loan categories, demographic details and loan characteristics, the officials said.

Deposits, Market Share

State-owned banks have also been losing deposits growth as well as market share across small and medium businesses, and in the retail and agriculture segments, the officials said.

Deposits growth at public sector banks slowed in March from December, the officials said. The share of deposits at these banks dropped from 66% in March 2019 to about 62% in Dec. 2022, they said.

–With assistance from Debjit Chakraborty.

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