The Indian banking system, which is flush with surplus liquidity, is currently in a Catch-22 situation. Though it is imperative for banks to extend lending support to their customers to help tide over the current crisis triggered by the Covid-19 pandemic, they also have to manage the risks associated with it.

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

“If banks don’t give credit there is a risk of failure of organisations. If banks lend too much, lending might take a hit on the balance sheet. Credit quality is a constraint and we have to look at ways to assess risks in an uncertain environment,” she said at a webinar on ‘Quantitative Easing and Credit Risk’ organised by the Indian Chamber of Commerce on Monday.

The various quantitative easing measures adopted by the regulator to pump in liquidity and reduce interest rates with a view to boost growth is also likely to have its own “side-effects”.

“Quantitative easing is like a medicine and like all medicines it also will have side-effects. There will be a risk of low interest rates encouraging 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 also need keep a watch on how a particular unit utilises the amount of money disbursed, she pointed out.

Indian Bank has close to 4.5 lakh MSME customers who are eligible for loans guaranteed by the government. The total estimated disbursements are likely to be to the tune of ₹7,000-7,500 crore. The bank has sanctioned loans amounting to ₹2,000 crore under the scheme so far.

While the schemes announced by the government to help the MSME sector is good in intent, the key lies in administering the same, said Rajesh Kumar, MD & CEO, TransUnion Cibil.

“There needs to be a tight monitoring mechanism for assessing MSMEs’ cash flows and production cycles. We have created a Cibil MSME rank to provide risk differentiation,” he said.

According to CS Ghosh, MD and CEO of Bandhan Bank, credit growth should start picking up in the second quarter of this fiscal. However, the biggest challenge would be to give credit to small enterprises which do not have any credit ratings.

Talking about the low level of NPAs in microcredit loans, Ghosh said it is important to engage with customers on a regular basis to ensure timely repayments.

“The difference between banking sector and microfinance is that bankers engage with their customers a number of times before the loan is sanctioned, buy once it is done they hardly communicate much till say, it turns into an NPA. However, in case of microfinance, engagement with borrowers takes place at frequent intervals after the disbursement, which ensures timely repayment, and hence, the low NPAs,” he said.

Published on June 15, 2020

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