Banks need robust credit appraisal policies to limit risk: RBI

Indian banks need to ensure they have robust due diligence and credit appraisal mechanisms in place to limit credit risk, given that uncertainties in the current macroeconomic conditions could be challenging, a Reserve Bank of India report said.

“If downside risks materialize, asset quality could be affected. Hence, slippages in restructured assets need to be monitored closely. Timely resolution of stressed assets is essential to prevent asset value depletion,” RBI’s Report on Trend and Progress of Banking in India 2021-22 said on Tuesday.

The push provided by Jan Dhan, Aadhaar and mobile—often called the JAM trinity—has resulted in increased access to banking services to the unserved and the underserved sections, the report said. The regulator said that with the success of India’s homegrown fast payments platform unified payments interface (UPI) and mass adoption of digital banking services, various concerns such as unbridled engagement of third parties, misselling, breach of data privacy, unfair business conduct, exorbitant interest rates, and unethical recovery practices have emerged.

“Banks need to develop appropriate business strategies, strengthen governance framework and implement cybersecurity measures to mitigate concerns,” the report said.

According to RBI, the banking sector has weathered the pandemic, emerging more resilient and robust. It cited timely policy support to say that banks have reported improved profitability, asset quality and capital buffers. More recently, bank balance sheets have seen healthy expansion, with broad-based credit growth driving the flow of resources to the productive sectors of the economy, it said.

In FY22, the consolidated balance sheet of scheduled commercial banks registered double-digit growth after a gap of seven years. Deposit growth, RBI said, moderated from the covid-19-induced precautionary surge a year ago. A rebound in borrowings after a two-year hiatus shored up the liabilities side, while on the assets side, the main development was the strengthening of credit pickup through the year.

“Despite some recent moderation, public sector banks (PSBs) still have the lion’s share in the consolidated balance sheet. At the end of March 2022, they accounted for 62% of total outstanding deposits and 58% of total loans and advances extended by scheduled commercial banks,” the report said.

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