Banks need robust credit appraisal policies to limit credit risk, says RBI

If downside risks materialize, asset quality could be affected. Hence, slippages in restructured assets need to be monitored closely, said RBI report

Shayan Ghosh
First Published27 Dec 2022
According to RBI, the Indian banking sector has weathered the pandemic, emerging more resilient and robust.
According to RBI, the Indian banking sector has weathered the pandemic, emerging more resilient and robust.(MINT_PRINT)

Banks in India need to ensure they have robust due diligence and credit appraisal mechanisms in place to limit credit risk, given that uncertainties in the current macroeconomic conditions could be challenging, a report by the Reserve Bank of India said on Tuesday.   

“If downside risks materialize, asset quality could be affected. Hence, slippages in restructured assets need to be monitored closely. Timely resolution of stressed assets is essential to prevent asset value depletion,” said RBI’s Report on Trend and Progress of Banking in India 2021-22.  

The push provided by the Jan Dhan, Aadhaar and mobile – popularly referred to as the JAM trinity -- has resulted in increased access to banking services to the unserved and the underserved sections of the population, the report said. The regulator said that with the success of India’s homegrown fast payments platform unified payments interface (UPI) and mass adoption of digital banking services, various concerns such as unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, exorbitant interest rates, and unethical recovery practices have emerged.  

“Banks need to develop appropriate business strategies, strengthen their governance framework and implement cybersecurity measures to mitigate these concerns,” it said.  

According to RBI, the Indian banking sector has weathered the pandemic, emerging more resilient and robust. It cited timely policy support to say that banks have reported improved profitability, asset quality and capital buffers. More recently, bank balance sheets have witnessed healthy acceleration with broad-based credit growth driving the flow of resources to the productive sectors of the economy, it said.  

The consolidated balance sheet of scheduled commercial banks registered double digit growth in 2021-22, after a gap of seven years. Deposit growth, RBI said, moderated from the covid-19-induced precautionary surge a year ago. A rebound in borrowings after a two-year hiatus shored up the liabilities side, while on the asset side, the main development was the strengthening of the credit pick-up through the year.  

“Despite some recent moderation, public sector banks (PSBs) still have the lion’s share in the consolidated balance sheet. At end March 2022, they accounted for 62% of total outstanding deposits and 58% of total loans and advances extended by scheduled commercial banks,” the report said. 

According to the report, a closer look into the balance sheet composition across bank groups shows their “operational idiosyncrasies”. The deposit funding ratio, defined as the share of deposits in total liabilities, is higher for public sector banks than for private sector banks, suggesting that private lenders resort to borrowings to fuel credit growth. Furthermore, while the loans-to-assets ratio of PSBs has historically remained lower than private banks, the investments-to-assets ratio of the former has remained higher, reflective of high investments in risk-free government securities. 

“Household financial saving rates declined to a five-year low in 2021-22, which was also reflected in subdued deposit growth.  The transmission of the 190 basis points (bps) increase in the repo rate during May-October 2022 to deposit rates is likely to provide a fillip to deposit growth rates,” it said. To be sure, RBI has raised the repo rate by another 35 basis points (bps) in December, taking the cumulative hike to 225 bps since May.

 

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