Slowing credit growth is one of the most critical challenges for the banking industry and there is a need to focus on prudent lending by the banks, Reserve Bank of India Governor Shaktikanta Das said on Monday.
So far this year, credit growth in the country has moderated to 7-7.5 per cent.
"The most critical challenge today for banks not just in India but also elsewhere is slowing credit offtake. It affects the profitability of banks," Das said at the Mint annual banking conclave here.
To facilitate the flow of credit, the RBI has taken several steps like reducing repo rate, facilitating bank refinance to NBFCs for onlending to priority sector and providing long-term repo operation (LTRO), among others, he said.
With such measures already in place, banks need to focus on credit offtake and flow of credit.
"While doing all that the focus should be on doing prudent lending and also to improve the operational efficiency of the banks," he said.
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"Prudent lending doesn't mean that you (bank) stifle and stop sanctions of loans and other things because you (bank) need to lend and unless you lend, how do you improve your profitability," the governor said.
He said the strength of a banking system depends on the strength of its corporate governance that fosters a robust and ethics-driven compliance culture.
"The RBI can only lay down certain rules, guidelines or sign post but ultimately the bigger responsibility as the custodian of the depositors' money and having an accountability to both the depositor and shareholders, banks will have to necessary focus on improving their governance and compliance culture," Das said.
The RBI would soon issue draft guidelines on corporate governance in public and private sector banks, he said.
The governor said the RBI's endeavour has constantly been to improve the efficacy of its supervisory and regulatory functions, so that the resilience of the regulated financial entities can be enhanced.
Speaking about NBFCs, he said that credit flow to small NBFCs have improved over the last one year.
The asset-liability management (ALM) position and other relevant aspects of top 50 NBFCs are being closely monitored, which covers all NBFCs with asset size above Rs 5,000 crore.
"The ALM of top 51-100 NBFCs is also being examined by the respective regional offices of the Reserve Bank," he said.
Das said besides structural changes, digital disruptions will continue to transform the banking sector. Initiatives undertaken by the government, the RBI and the industry have led to a radical shift towards ubiquitous digitization, which has provided an impetus to adoption of technology, he said.