Banking risks: Indian banks may not have priced risks correctly: RBI deputy governor – The Economic Times–19.01.2018

He also stressed on the fact that banks need to act early and take decisions through joint lenders forum to contain incipient stress in the banking system.

Indian banks may not have priced risks correctly while giving out all large loans, suggested RBI deputy governor NS Vishwanathan while speaking at an event organized by CARE Ratings in the financial capital today. Vishwanathan said that banks unable to properly ascertain risks have a fundamental problem and they needed to improve their capabilities in risk based pricing.

“Once a Creditor has decided to sanction a loan to a potential debtor, the next step should be to arrive at a risk-adjusted interest rate to be charged, this is one area where banks in India need to upgrade this skill,” he said.

He also said that such pricing of loans would need fair assessment and understanding of the risk involved rather than merely relying on collateral and guarantees obtained from stakeholders.

“Banks should charge interest rate which commensurate with risk involved in the project. However, in many instances risk is underpriced. It can be safe to assume that proper risk had been done by banks, many of the current NPAs could have properly assessed well in advance,” Vishwanathan said.

Many Indian banks are burdened with bad loans which aggregate about Rs. 8.4 lakh crores as of September. State-run banks dominate the segment and had to set aside large amounts of money to face any loses. Government banks combined lost Rs 18, 066 crore loss last fiscal.

The RBI deputy governor also urged banks to formulate strong loan covenants and enforce them in time.

“Bankers need to protect their interest by writing strong covenants, strictly enforcing the covenants, properly pricing of risk and reacting to early warning signals about incipient stress that is building up. All this should be embedded into the credit culture of banks,” he said.

He also stressed on the fact that banks need to act early and take decisions through joint lenders forum to contain incipient stress in the banking system.

“Coordination mechanisms among banks, through institutional platform like JFK must be ideally deployed before the account is classified as a special mention account, Vishwanathan said. “We have mandated JLF when the account is in SMA 2. I would rather suggest that moment the default happens, even a day or two, banks should start getting alert. JLF should function on the lines of the Committee of Creditors envisaged in the IBC.”

via Banking risks: Indian banks may not have priced risks correctly: RBI deputy governor – The Economic Times

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