Risk mitigation measures to be taken by banks

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The Banks need to help businesses by using lending, but at the same time they need to have adequate risk mitigation measures in place, State Bank of India (SBI) handling director Arijit Basu stated on Tuesday. In the latest months, credit growth has dropped to 5-6 per cent levels amid COVID-related uncertainty and muted loan demand.

“All lending must be prudential lending looking at companies which have a good business model, viable cash flow after which (be taken) forward. All companies will no longer have the best ratings because while you are going into for project finance there’s an element of higher risk but then banks can lend after taking due care,” Basu stated, speaking at an event organized utilizing the Indian merchants’ Chamber. Bankers will have to ensure that they reach out to new customers, but at the same time, they will have to ensure that they do not repeat the mistakes of the past, he added.

 Last week, the RBI had rapped banks for being too risk-averse amid a crisis. “Remaining overly risk-averse can also appear to be a measure of self-immunization, but maybe self-defeating as it’d affect the bottom lines adversely,” RBI governor Shaktikanta Das had stated. He had further found that banks’ risk management system should be sophisticated enough to smell vulnerabilities brewing in the various businesses well in advance.

Basu on Tuesday stated there’s a need to study all underwriting standards, generally those related to how banks understand the risk in a specific proposal. “We need to recognize why certain companies are in stress and as long as they are so owing to extraneous factors like Covid-19, the complete banking community has risen to the occasion and supported all of them,” Basu said. He added that even earlier than the government schemes came, most banks had come forward to assist the industry and lent additional 10% funds.

“The RBI also has given a lot of dispensations and they were been quite wise and sagacious. I ‘am pretty sure that the banks will respond to it and make sure we lend to the right companies,” Basu said, adding, “We have to be prudential but have to go forward.” throughout sectors, as unlocking happens, banks will have to take an initiative and not shy away from lending.

At the same time, they’ll avoid being reckless and relapsing into the same issues which impacted them only a few years ago. “This balance between the support to industry and the risk mitigation capacities is very crucial,” Basu said.

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