Improve pricing of risk-based loans, RBI tells banks

Banks in India must improve pricing of loans based on risk assessment, a skill that would have helped them avoid non-performing assets, said N.S. Vishwanathan, deputy governor of the Reserve Bank of India on Thursday.
He also asked banks to improve underwriting standards by writing strong loan covenants—agreements with the borrowers—as well as enforcing them on time.
Indian banks are currently sitting on a stressed asset pool of over Rs10 trillion.
“Risk-based pricing of loan would need fair assessment and understanding of the risk involved, rather than merely relying on collateral and/or guarantees obtained from stakeholders including equity holders. Banks should charge interest rate that is commensurate with the risk involved in the projects that are being financed,” he said at an event.
In many instances, risk is under-priced, he said.
“It would be safe to assume that had proper risk pricing been done by banks, many of the current NPAs (non-performing assets) could have properly assessed very well in advance,” he added.
According to Vishwanathan, risk-based pricing will help lenders build buffers that will act as cushions in case certain projects become non-performing assets. Such assessment must also be in sync with the stage of business cycle where the borrowers operate.
Enforcing loan covenants along with proper risk pricing and early recognition of stress must be embedded in credit culture of banks, he said.
Early recognition of stress has assumed even more significance under the resolution mechanism of Insolvency & Bankruptcy Code (IBC). This is because the IBC has strict timelines for resolution; else, the asset is liquidated.
“In IBC, the possibility of equity holders losing an entity should result in both stakeholders, creditors as well as debtor, to work towards resolution that is best for them. Both of them have an interest in keeping it in going concern. Therefore, coordination mechanisms among banks, through institutional platform like joint lenders’ forum (JLFs) must ideally deploy before the account is classified as special mention account (SMA),” he said.
RBI has mandated banks to form JLFs when the account is classified SMA-2.
When the principal or interest payment for a particular loan is overdue between 61 and 90 days (and not exceeding 90 days), this is called special mention account-2 or SMA-2.
“Use of covenants in monitoring loan exposures can reduce stress and time to recovery. A covenant remains a simple, but an often ignored tool in the Indian context and could be used more effectively to avoid a repeat of the asset quality problems facing the Indian banking system,” said Udit Kariwala, senior analyst, financial institutions, at India Ratings.
According to India Ratings’ analysis of 83 stressed corporate borrowers with a debt of Rs5.1 trillion (classified as default by at least one rating agency by 31 May 2016), had banks restricted incremental debt to companies using the efficacy of covenants, the time to recovery from organic cash flows would have been half of the current levels of 19 to 24 years. In certain cases, the stress could have even been avoided.
Link: http://www.livemint.com/Industry/0GgMPS3klPeBPT8xajivHK/Improve-pricing-of-riskbased-loans-RBI-deputy-governor-tel.html

Comments

Post a Comment

Popular posts from this blog

 The Telegraph  December 24, 2020 A new, potentially more infectious variant of the novel coronavirus that causes Covid-19 has been found in Britain in cases linked to South Africa, British health secretary Matt Hancock said on Wednesday.  South Africa’s health department said last week that a new genetic mutation of the virus had been discovered and might be responsible for a recent surge in infections there. “Thanks to the impressive genomic capability of the South Africans, we’ve detected two cases of another new variant of coronavirus here in the UK,” Hancock told a media briefing. “Both are contacts of cases who have travelled from South Africa over the past few weeks.”  Britain is already trying to curb the spread of a mutated strain of the virus which is up to 70 per cent more transmissible, and further studies are being carried out on the new variant. “This new variant is highly concerning, because it is yet more transmissible, and it appears to have mutated ...
Read more
 The Indian Express December 24, 2020 Prachanda elected as new parliamentary leader of Nepal’s ruling party Madhav Kumar Nepal, who was elected chairperson of the party, proposed Prachanda’s name as the leader of the Parliamentary Party. The dissident faction of the Nepal Communist Party on Wednesday elected Pushpa Kamal Dahal ‘Prachanda’ as leader of its Parliamentary Party, a post previously held by Prime Minister  K P Sharma Oli . Madhav Kumar Nepal, who was elected chairperson of the party, proposed Prachanda’s name as the leader of the Parliamentary Party. A party meeting then unanimously endorsed the proposal. However, none of Oli’s supporters attended Wednesday’s meeting. Leaders of the Prachanda-led faction have also told the Election Commission that they hold a two-thirds majority in the party and therefore they must be granted official recognition by the election body, My Republica reported. “We are here with the proof that we are the only legitimate Nepal Communist ...
Read more

CIBIL- SIDBI study: ‘Despite rate cuts & govt push, MSME credit growth slides’

The Indian Express October 17, 2019 Mirroring the deepening slowdown in the economy, commercial lending exposure in the country has declined 2.6 per cent, or Rs 1,70,000 crore, to Rs 63.8 lakh crore in the June quarter of 2019-20 from Rs 65.5 lakh crore in March 2019, said a TransUnion CIBIL- SIDBI study. Despite several rate cuts by the RBI, micro, small and medium enterprises (MSMEs) have recorded a slide in credit exposure. “Entities having less than Rs 25 crore credit exposure have reported a lower credit growth rate of 12 per cent in the year ended June 2019 as against a growth rate of 23.1 per cent last year. Very small segment (less than Rs 10 lakh exposure) have registered a credit growth of only 11.3 per cent in June as against a growth rate of 26.2 per cent last year,” says the study. Of the Rs 63.8-lakh crore commercial lending exposure, micro and SME segments account for Rs 15.7 lakh crore exposure (24.5 per cent of commercial credit outstanding). While mi...
Read more