The Reserve Bank of India has undertaken an exercise to understand the business models of banks in its ongoing annual inspection as the banking sector has not seen much disruption in the loan growth trends even with the increase in interest rates.
Every year to make the routine annual inspection of banks interesting, the RBI picks up a certain aspect and quizzes banks. For FY23, the theme is the sustainability of business models. It is learnt from highly placed sources that the banking regulator is closely understanding and questioning banks about their business models in the ongoing annual inspection. This is particularly so for the top ten banks of the country.
“Despite the sharp hike in repo rates and lending rates, we have not seen much disruption in the loan growth trends or asset quality of banks. This is quite unusual compared to previous rate hike cycles and the regulator is keen to know how banks are managing such robust growth and profitability,” said a CEO of a private bank who didn’t want to be named.
“Though on a low base, most banks have seen a rapid growth in their unsecured retail and MSME books. This is something that the RBI isn’t comfortable with and is gauging how long this trend can continue without damaging the asset quality of banks”.
Unsecured loans, a pain point
On April 30, businessline reported that the RBI has asked banks to go slow on unsecured loans which historically have been 2–2.5 per cent credit loss business. However, in the current cycle, credit losses in this portfolio have been contained at a per cent or lesser for most banks.
“There are reasons to believe that much of the pain is probably getting masked by faster growth in the segment, leading the regulator to suspect that instances of loan roll over may be rampant,” said a person aware of the matter.
Profitability of banks hit an all-time high in FY23 and this is something which the regulator did not expect. “Even if there were some signs of cooling-off of yields or net interest margin, it wouldn’t have raised the red flags,” said the source.
In the last two years, the focus of the regulator was to ensure that operations were fully under check and didn’t suffer because of the pandemic. Now with those aspects not the concern for the sector, the attention has shifted to business models of banks.
“This year’s inspection is focussed on drilling into the sustainability of growth posted by banks without compromising on credit standards and underwriting practices,” said another senior executive of PSU bank. Apparently, taking initial cues from the regulator, some banks have already started pruning their internal targets to ensure that they fall in line with the regulatory expectations.