Don’t outsource credit appraisal function, Mundra tells bankers

Banks should resist the temptation to lend to a sunrise sector following a herd mentality, SS Mundra, RBI Deputy Governor, said.

Concentration risk can hurt banks badly as has been the case in the past in lending to the steel, mining, gems and jewellery and infrastructure sectors, Mundra said at an Assocham event here on Monday. Exposure concentration in one sector in a geographical area (exposure to sugar mills in UP, for instance) also suffers from political risk, Mundra said.

Mundra also advised bankers not to outsource their responsibility of credit appraisal to any third party.

“Lending is the most critical of banks’ functions and that cannot be outsourced. We encourage banks to outsource non-core activities,” Mundra said.

He also noted that the computation of base rate by banks has not been found to be “very scientific and transparent”.

Mundra said that the level of stressed assets in the system underscores the need to improve the monitoring of banks as lenders as also the need for borrowers to adhere to the loan covenants.  

The RBI Deputy Governor expressed concern over excessive leverage run up by companies. The issue of diversion of funds by borrowers to real estate or capital market for short-term gains without deploying them for purposes borrowed was also highlighted.

“Rather than de-risking the balance sheet, such short-term misadventures often prove very costly,” he said. 

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