A senior central bank official on Saturday asked banks to work very hard to strengthen their risk management systems so that they can critically review their credit risks management processes.
Banks, led by the public sector lenders, are fighting a record pile up of bad loans, which as of March 2018 had crossed 11.6 per cent of the system, and the central bank fears that it may rise by 100 bps more, in the best case scenario, by March 2019.
“Pre-sanction appraisal needs to be really taken to another level. It has to be more conservative and requires very careful debt-equity mix which is not compromised going forward,” Sudarshan Sen, an executive director at the Reserve Bank said here.
Addressing a CII-organised industry event on the insolvency process, Sen said complying with loan covenants is another area where we have seen a lot of deviation from what was agreed up on at the time of loan sanction and such deviations have resulted in the deterioration of the credit quality.
One of the areas which the central bank has been emphasising is making the banks identify stress early, Sen said and pointed out that picking up the early warning signals and taking early corrective actions coupled with adopting a transparent restructuring mechanism is the way forward, “so that we preserve the economic value of such accounts.”