RBI to banks: Avoid frequent ad hoc review of credit facility for businesses

By: |
August 21, 2020 10:31 PM

Industry sources said the RBI directive comes in the backdrop of complaints that banks are charging high differential interest rates and not giving adequate financial support to businesses.

rbi news todayThe RBI said that an analysis of practices followed by the lenders has brought out certain supervisory concerns

Concerned over frequent changes in loan facility to businesses, the Reserve Bank on Friday asked all the lenders, including urban cooperative banks and small finance banks, to avoid repeated ad hoc and short review of credit facilities without justifiable reasons. Industry sources said the RBI directive comes in the backdrop of complaints that banks are charging high differential interest rates and not giving adequate financial support to businesses in line with the announcements made by the government from time to time to help the crisis-ridden industry.

“…timely and comprehensive review/renewal of credit facilities should be an integral part of the board-approved loan policy and credit risk management framework, and banks should avoid frequent and repeated ad hoc/short review/renewal of credit facilities without justifiable reasons,” the RBI said in a communication to commercial banks, urban cooperative banks, and small finance banks.

The RBI said that an analysis of practices followed by the lenders has brought out certain supervisory concerns including frequent and repeated ad-hoc review of credit facilities instead of regular review.

The central bank asked the banks to capture all the data relating to regular as well as ad-hoc review of credit facilities in their core banking management information systems and make it available for scrutiny as and when required by the auditors or the RBI.

Further, it added, the processes governing review or renewal of credit facilities should be brought under the scope of audit control mechanism of banks with immediate effect.

“We advise that all banks should follow above instructions in letter and spirit,” the RBI added. As per a circular on risk management system in banks, scheduled commercial banks are required to put in place a board approved credit policy prescribing the periodicity and methodology of review and renewal of credit facilities.

The policy should also prescribe differential time schedules for review and renewal of borrower limits so that lower-rated borrowers whose financials show signs of problems are subjected to renewal control more frequently.

Banks are expected to have a detailed board-approved policy on methodology and periodicity for review and renewal of credit facilities within the overall regulatory guidelines, and adhere to the them strictly, the RBI added.

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