“Assessing credit risk in an uncertain environment is a big challenge”

India’s banking system, which is teeming with excess liquidity, is currently in a catch-22 situation. While it is imperative for banks to extend their support for loans to their customers to help overcome the current crisis triggered by the Covid-19 pandemic, they must also manage the risks associated with it.

According to Padmaja Chunduru, MD & CEO, Indian Bank, assessing credit risk in an uncertain environment is one of the biggest challenges facing the banking industry.

“If the banks do not extend credit, there is a risk of organizational failure. If banks lend too much, the loans could strain the balance sheet. Credit quality is a constraint and we need to look for ways to assess risk in an uncertain environment, ”she said during a webinar on“ Quantitative Easing and Credit Risk ”hosted by the Bank. Indian Chamber of Commerce Monday.

The various quantitative easing measures adopted by the regulator to inject liquidity and reduce interest rates in order to revive growth should also have their own “side effects”.

“Quantitative Easing is like a drug and like all drugs, it will have side effects as well. There will be a risk that low interest rates encourage borrowers to splurge on loans, ”she said.

However, it is important for banks not only to sanction loans, but also to ensure that disbursements take place. Banks should also monitor how a particular unit uses the amount disbursed, she stressed.

Indian Bank has nearly 4.5 lakh of MSME clients eligible for government guaranteed loans. The total estimated disbursements are likely to be in the range of 7,000 to 7,500 crore. The bank has sanctioned loans amounting to 2,000 crore under the program so far.

Although the programs announced by the government to help the MSME sector have good intention, the key lies in their administration, said Rajesh Kumar, managing director and CEO of TransUnion Cibil.

“There needs to be a strict monitoring mechanism to assess MSMEs cash flow and production cycles. We created a Cibil MPME ranking to differentiate the risks, ”he said.

Credit growth

According to CS Ghosh, managing director and CEO of Bandhan Bank, credit growth is expected to start accelerating in the second quarter of this fiscal year. However, the biggest challenge would be to extend credit to small businesses that do not have a credit rating.

Speaking about the low level of APNs in microcredit loans, Ghosh said it was important to engage in regular dialogue with clients to ensure timely repayments.

“The difference between banking and microfinance is that bankers engage with their clients a number of times before the loan is sanctioned. However, in the case of microfinance, engagement with borrowers occurs at frequent intervals after disbursement, which ensures timely repayment and hence low NPAs, ”he said.

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