Banks facing a credit risk: Leeladhar

Competitive pressures and faster pace of processing credit decisions have forced banks to compromise on their credit risk management techniques, said the Reserve Bank of India's deputy governor V Leeladhar.

"With borrowers having equal access to external fund-raising options, finding good accounts has become an uphill task for banks," he pointed out.

Leeladhar attributed the rising competition levels in the system to capital market developments and the liberalised environment, which give corporates the leeway to raise funds at lesser costs.

Speaking of the credit portfolio, Leeladhar explained that impairment of assets has a double-edged impact on the banks' bottomlines.

While, on one hand, the total income witnesses a decline, on the other, provisions need to be made for non-performing assets (NPAs) from the current year's profits. NPAs also affect borrowers in terms of the service quality and cost of credit.

Among major factors impairing loans, the deputy governor said, "Existence of inadequate credit appraisal systems in banks, coupled with their eagerness to 'win over' large accounts and tendency to go by the reputation of the customer rather than the individual merit of the loan proposal are some important factors contributing to NPAs."

Keeping in mind the need to increase the options available for banks to resolve their impaired assets, the RBI official pointed out that guidelines were issued to facilitate banks' sale and purchase of NPAs.