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Mumbai, Oct 7: Reserve Bank of India (RBI) governor YV Reddy on Friday advised banks to re-examine their systems and procedures for lending to corporates.
In a thinly veiled warning to banks, he cautioned them against allowing transaction-based relationships to replace traditional banker-customer relationships as that could affect their ability to make a proper credit assessment.
Addressing the valedictory session of a Ficci-IBA conference in Mumbai on Friday, Dr Reddy expressed concern over the possibility of under-pricing of credit risk for private sector corporates and overpricing of risks in lending to agriculture as well as small and medium enterprises.
“There is merit in reviewing the current procedures and processes of pricing of credit, perhaps through a well structured segment-wise analysis of costs at various stages of intermediation in the whole credit cycle,” he advised.
The share of corporates in lending by banks does not reflect the full range of banks’ exposure as it does not capture the significant exposure through investments in bonds and other instruments including non-funded exposures through credit substitutes and derivatives transactions, he said.
Corporates on their part must make adequate disclosures about their own risk exposures voluntarily so that bankers can make a proper risk assessment, he said. Dr Reddy’s advice comes in the backdrop of a strong growth in non-food credit - 25-30% - year-on-year. The governor also said the Corporate Debt Restructuring Mechanism is being reviewed to make restructuring smoother for genuine cases.
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