Nirmala Sitharaman retains finance ministry: A look back at her key measures for banking sector

Nirmala Sitharaman in January 2024 said that the government and RBI are actively engaged in improving the central bank digital currency (CBDC) so that it can be used for cross-border payments.

The Union finance ministry had no change of guard when the third Narendra Modi-led National Democratic Alliance government came to power last week with Nirmala Sitharaman retaining the mantle.

During her tenure in the past NDA governments, Sitharaman focused on extending banking services to make them more accessible, role of the insolvency and bankruptcy code, continued surveillance of cybersecurity risks, among key things.

Here's a look back into the major focus areas in the banking sector as she led the portfolio since May 2019.

Focus on financial inclusion

On June 1, Sitharaman said the government is dedicated to expanding formal banking access and will continue to take decisive measures to strengthen and stabilise the banking system. This will ensure that banks support India's growth path to Viksit Bharat by 2047.

“Our government has ‘banked the unbanked’ and ‘funded the unfunded’ in line with the ethos of Antyodaya. We remain committed to further driving financial inclusion and empowering the underprivileged,” she said in a series of posts on X.

Also read: Nirmala Sitharaman returns as India's finance minister

Sitharaman also said that due to the various reforms, the ability of public sector banks to raise capital has improved. The PSBs have mobilised Rs 4.34 trillion from the market between financial year 2014-15 and FY2023-24. “Macro stress tests for credit risks indicate that banks are well-capitalised. All banks comply with the minimum capital requirements even under adverse stress scenarios,” she said.

Monitoring cybersecurity and lending risks

In a meeting with heads of state-run lenders on December 30 to review their financial performance, the finance minister raised concerns related to cyber security and the financial sector reforms. Sitharaman directed the PSB chiefs to enhance due diligence before loan disbursement to ensure responsible lending practices across the board. She also asked the them to ensure regular monitoring of large loan accounts and undertake swift and thorough legal action in cases of default.

The banks were also directed to adopt proactive cybersecurity measures and implement stringent security protocols to ensure that the integrity of domestic financial systems remained uncompromised.

Mapping RBI’s role in regulation

Speaking on the occasion of the 90th anniversary of the RBI, the finance minister lauded the central bank for its role in improving the balance sheet problems faced by banks.

"Managing India's banks is something which I recall at this time," she said. India had a balance sheet problem a decade ago, while today there is a balance sheet advantage for India because of the collaborative effort of the government and the RBI, she said. The asset quality management, prompt corrective action framework are all great functions well carried out by "our true regulator of the banks, the Reserve Bank of India (RBI)”.

Boosting CBDC

The finance minster had in January 2024 said that the government and the RBI were actively engaged in improving the central bank digital currency (CBDC) so that it could be used for cross-border payments.

“We strongly believe it helps in cross-border payments. It will bring in greater transparency and traceability,” she said at an event marking 125 years of Hindu College. “It helps in speeding up payments with less cost and also brings down costs for inward and outward remittance.”

On PSB mega mergers

Sitharaman took over as the Union finance minister in May 2019. Three months later in August 2019, she announced the merger of Punjab National Bank, Oriental Bank of Commerce and United Bank. The other mergers were between Canara Bank and Syndicate Bank, between Union Bank, Andhra Bank and Corporation Bank, and between Indian Bank and Allahabad Bank.

When the first Modi government came to power in 2014, state-run banks were grappling with huge burden of bad debt. Sitharaman added that the gross non-performing assets (NPA) of PSBs have come down to Rs 7.9 trillion in the March quarter of FY19 from Rs 8.65 trillion in the December quarter. Out of 18 public sector banks, 14 are in profit-earning situations, she pointed out.

On privatisation of banks

Speaking at a media conference in Mumbai in May 2023, Sitharaman said that privatisation of public sector banks will take place as per the government’s schedule, indicating that it might be taken up after the 2024 general elections.

“It (bank privatisation) will go on as per schedule and there is no change in it,” she said while responding to a question on progress of her earlier announcement to privatise two PSBs.

On capital infusion in PSBs

Sitharaman on February 1, 2021, announced a capital infusion of Rs 20,000 crore in state-owned banks for the financial year 2021-22. This was the latest round of infusion made by the government. Banks require capital to meet the mandatory reserve requirements laid out by the RBI, make provisions for bad loans and kick-start the lending cycle when demand revives in the economy.

Also read: Budget 2021: FM Nirmala Sitharaman announces Rs 20,000 crore fresh capital infusion for PSBs

In the last Union budget, the FM didn’t allocate any fresh capital for PSBs. Sitharaman said that over years, the government has infused Rs 3.5 lakh crore in PSBs and asked them to move to the capital market for fund-raising purposes.

On credit to MSMEs

In an interaction with MSMEs in May 2024 in Ludhiana, the FM assured that the tax relief for Micro, Small and Medium Enterprises (MSME) enterprises remains accessible. Sitharaman said the Centre is willing to reconsider the 45-day payment rule for the MSMEs if the industry wants it. She added that if they require an extended payment period, they can submit representations for "consideration in the upcoming July Budget".

Also read: Union Budget 2024: Bank privatisation plan unlikely before general elections, say experts

In her interim budget speech on February 1, 2024, Sitharaman said that the government has prioritised the development of MSMEs to allow them to grow and compete globally.

“It is an important policy priority for our government to ensure timely and adequate finances, relevant technologies and appropriate training for the micro, small and medium enterprises,” she said in the interim budget 2024-25.

The government has allocated Rs 22,137 crore to the MSME ministry for FY25, which is the same as last year.