Banks urged to evaluate corporate risks

Banks are under-pricing corporate risks with too much money chasing too few assets.

Some banks are providing loans to top-rated corporates at yields below that on government securities, which bankers feel could give rise to interest rate risks.

"As signs of a pick up in corporate credit emerge, banks need to exercise more prudence in pricing these risks," said G V Nageshwar Rao, managing director, IDBI Bank.

Credit offtake to corporate entities is expected to kick-start in the next 18-24 months, said Chanda Kochhar, executive director, ICICI Bank.

"The top 300 corporates we deal with are planning investments in the region of $40 billion, though we are not certain when this will kick-start," she added.

Both Nageshwar Rao and Kochhar were speaking at the two-day India Banking Summit in Mumbai this week which focused on challenges facing the Indian banking sector.

While bankers participating in the summit pointed to the corporate credit risk, they did not feel retail lending was a problematic area.

"Basel II will help in better pricing risks as banks will compulsorily need to put in place a rating system," said Rao. This, he added, would spur banks to be more rational in the pricing of corporate credit.

The Reserve Bank of India (RBI) had in the credit policy pointed to the possibility of a credit risk bubble in retail lending.

This skepticism, however, is not shared by the industry. "Retail lending is growing at the rate of 30-35 per cent annually. This growth is expected to continue on the back of changing spending habits, rising earning potential and the fact that penetration is still relatively low," said Kochhar.

ICICI Bank expects a growth rate of 40 per cent in retail lending this year, with its retail book growing by 40-60 per cent year-on-year.

The central bank had in the credit policy increased the risk weightage on home loans and personal loans by 25 basis points. Banks now have to provide a higher capital of 75 per cent for home loans and 125 per cent for personal loans.