Banks must lend to win their bread, says RBI Governor Shaktikanta Das

After a series of interest rate cuts could not translate into cheaper loans for businesses and people as banks remained reluctant to pass on the benefits, Reserve Bank of India Governor Shaktikanta Das on Thursday warned lenders that extreme risk aversion will be “self-defeating”.

Banks’ credit growth has slowed to 5.5% at the end of July compared to 12% during the same period last year.

“It would create a situation where the banks will not be able to win their bread. In other words, it will impact their income also. Extreme risk-aversion is certainly not desirable,” Das said at a media event.

He said the Covid-related shock has placed a greater pressure on banks’ balance sheets, and this may lead to an erosion of their capital. Banks must respond to the situation quickly and start raising capital.

“Proactive building of buffers will add to the resilience of banks and also the financial sector,” Das said.

He also asked the lenders to smell the vulnerability within businesses in time in order to take corrective steps.

“The risk management systems of banks should be sophisticated enough to smell vulnerabilities brewing within various businesses well in advance and should be dynamic enough to capture the looming risks in sync with changes in the external environment,” Das said.

“One visible area of concern in the arena of risk management is the inability or the ability to manage the incidence of frauds, both cyber related and otherwise,” he added.

Das said the higher incidence of frauds which have come to light in recent times have their origins in the “not so efficient risk management capacity of the concerned banks both at the time of sanctioning the loans and also post-sanction credit monitoring”.

His comments come days after the RBI annual report said bank frauds had doubled to Rs 1.85 lakh crore in the year gone by.

He said the RBI has asked banks and other financiers to do stress testing. Once any stress point is identified, the lenders have to use available dispensations and the June 7, 2019, circular.