After Viral Acharya, another RBI Deputy Governor asks banks to develop better risk-pricing skills

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Published: January 18, 2018 4:33:21 PM

Just days after Reserve Bank of India (RBI) Deputy Governor Viral Acharya Banks warned banks on their weak risk management culture, other Reserve Bank deputy governor NS Vishwanathan on Thursday asked the lenders to put in place proper risk-pricing mechanism, especially for funding long-gestation infra projects, if they want to prevent an encore of the present bad loan pile-up.

Viability report, Banks, RBI, JSPL, Jindal Steel & Power, Reserve Bank of India, NPA, steelmaker, techno economic viability, TEV, State Bank of India, Punjab National Bank, ICICI Bank, IDBI Bank, Axis Bank, HDFC Bank, Canara BankBanks are saddled with over Rs 10 trillion bad loans in the system. (Image: Reuters)

Just days after Reserve Bank of India (RBI) Deputy Governor Viral Acharya Banks warned banks on their weak risk management culture, other Reserve Bank deputy governor NS Vishwanathan on Thursday asked the lenders to put in place proper risk-pricing mechanism, especially for funding long-gestation  infra projects, if they want to prevent an encore of the present bad loan pile-up, PTI reported. Banks are saddled with over Rs 10 trillion bad loans in the system, most of them in infrastructure sectors like power, steel and road projects, forcing the RBI to list as many 40 largest NPA accounts, which constitute 40 percent of the mess, to be referred to the national debt tribunals for recovery and resolution in 2017.He said in many instances risk is underpriced so as to demonstrate that a project would be sustainable, and hence would be good to finance.

“It would be safe to assume that had proper risk pricing been done, many of the current NPAs could have properly assessed very well,in advance,” PTI reported Vishwanathan saying at credit markets conclave organised by Care Ratings today. The gross non-performing assets of banks rose by 18.5 per cent on an annualised basis in the September quarter to 0ver 10.2 percent system wide or a little over Rs 10 trillion in absolute terms. And the regulator has projected it would cross 10.8 per cent by this March. The deputy governor said once a creditor has decided to sanction a loan to a potential debtor, the next step for them is to arrive at a risk-adjusted pricing, and this is one area where banks needs to upgrade their skills.

Acharya had observed late on Monday that large holdings of G-Secs and state development loans by banks exposes them to “re-pricing of governments’ borrowing costs which could rise due to inflationary, fiscal or other domestic as well as global macroeconomic developments”. The DG was speaking at an annual dinner hosted by the Fixed Income Money Market and Derivatives Association of India. Acharya asserted that the trend of regular use of ex-post regulatory dispensation to ease the interest rate risk of banks was not desirable from the point of view of efficient price discovery in the G-Sec market and effective market discipline on the G-Sec issuer. “It also does not augur well for developing a sound risk management culture at banks,” he said.

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