Bankers need to protect their interest by strictly enforcing the covenants, properly pricing their risks, and reacting to early warning signals about the incipient stress building up with their borrowers, RBI deputy governor NS Vishwanathan said at an event organised by CARE Ratings on Thursday. “All this should be embedded into the credit culture of the banks,” he said.The deputy governor pointed out that credit analysis should reduce the information asymmetry issues between the borrowers and the potential lender. “The creditor should also enhance the data-mining processing capabilities to increase the efficiency of the utilisation of data,” he said. Vishwanathan pointed out that once a creditor has decided to sanction a loan, the next step should be to arrive at the risk-adjusted interest rate to be charged. Potentially, this is one area where banks in India need to upgrade their skills, he observed.
The deputy governor further indicated that risk-based pricing of loans would create a fair assessment and understanding of the risk involved in each loan. “Rather than merely relying on the collateral and/or guarantees obtained from stakeholders, including the equity holders, banks should start charging interest rates commensurate with the risks involved in the projects that are being financed. However, in many instances, the risk is underpriced so as to demonstrate that the project would be sustainable and hence would be good to finance. It would be safe to assume that had proper risk pricing been done by banks, many of the current NPAs would have been properly assessed well in advance,” he said.
He also asserted the importance of lenders understanding the business cycles of their debtors. “The banks should also be mindful of the stage of the business cycle in which the borrowers are in at any point of time,” he said. Vishwanathan said that co-ordination mechanisms among banks, like JLF (joint lenders forum), should be ideally deployed before the loan is even classified as SMA (special mention account). “We have mandated there must be a JLF when there is an SMA-2. I would rather suggest that the moment a default happens even for a day or two, banks should start getting alerted,” he said.