Centre Asks Rigorous Stress Tests Of State-owned Banks

Centre has directed state-owned banks to improve their stress testing methods after it was discovered that they had slipped behind in developing models to mitigate the risk of failure.

According to officials familiar with the matter, the matter was discussed at a 25 March meeting of bank leaders with Finance Minister Nirmala Sitharaman to discuss the progress of a reform plan for the lenders. 

In June, Sitharaman stated that banks would develop stress-testing models to help them respond to customer needs and competition.

None of the 12 lenders, known as public sector banks, have developed complete stress testing models based on suggestions, according to officials who declined to be named because the meeting was private. 

According to the companies, they have not adopted models that include over 1,000 scenarios such as the extent of historical data, the number of risk types, and rare events.

A spokesperson for the Finance Ministry did not reply to an email seeking comment.

So far, only one bank has incorporated more than 30 macro indicators, including GDP, into its model, while only half of the banks have conducted stress testing at the micro-cluster level, taking into account product loan categories, demographic details, and loan characteristics, according to officials.