Keep up with global best practices, banks told

Indian banks have been urged to continue adopting global best practices in credit risk management by centralising their risk management systems.

This would help eliminate individual discretion and ensure uniform credit evaluation standards in the bank, stated the rating agency Fitch, in its report 'Credit evaluation in Indian banks: Moving towards best practices', released yesterday.

Separating the bank's marketing and credit functions, and establishing an independent risk evaluation group are just some of the best practice measures highlighted in the report.

Today most banks' operations "" including marketing, appraisal, disbursal and recovery "" have traditionally centred on the branch-level. This felt Fitch could lead to potential conflicts of interest when evaluating the credit risk of a borrower.

Urging banks to continue adopting global best practices in credit risk management, Fitch said that this would help sustain the momentum of lower non-performing loans (NPLs) and banks' ability to better manage new consumer loan business. The rating agency expects small-and-medium enterprises (SME) lending to be growth area for most banks.

Loan monitoring, like credit or recovery, is another critical aspect that needs to be treated as a specialised function, said the rating agency in its report.

"The increased complexities of corporate and consumer lending businesses as well as the growing competition among Indian banks reinforce the need for stronger risk management systems," the agency said.

Given the robust growth in the economy, banks are expected to see a rapid increase in disbursements, which would further add to the challenge of their internal credit systems.