Banks cautioned against concentrating lending to a particular group or industry

Mumbai: The Finance Ministry has warned the country's public sector banks against concentrating credit to a particular group or industry and urged them to diversify their credit portfolios.

A recent review of the financial performance of public sector banks for the year 2022-23 found that five out of twelve public sector banks in the country had over-lended to a specific group or industry, prompting the Finance Ministry's notice, banking circles said. The top ten borrowers accounted for more than 10 percent of the outstanding loans in five public sector banks at the end of March 31, 2023.

Sources in a public sector bank clarified that they only lend to corporates with a guarantee provided by the government or with a high rating. The finance ministry also reviewed the exposure to the capital adequacy ratio of the respective banks in case large corporate borrowers default. Sources also said the review was done as part of a risk assessment exercise.

The Reserve Bank has set limits through norms to prevent over-lending to a particular group, as such risks do not often undermine the health of the bank. After the recent reports of bank failures in Europe and America, the Reserve Bank and the Finance Ministry have become alert.