Follow thy neighbour is not a good policy in banking: S S Mundra

For making lending decisions, banks must carry out their own due diligence and take on risks accordingly

Reserve Bank of India deputy governor S S Mundra cautions banks to not make credit decisions based on what other lenders do.

“Follow thy neighbour...as far as banking is concerned, it is not a good policy. You cannot say because someone else has done (lent), so it must be that everything is all right and I will also lend. Everyone should have their own processing and prudential norms,” said Mundra at a book launch here on the history of Bank of India.

Banks must do their own due-diligence before lending.  To check bad loans, he advised banks to do background checks on their own, not to outsource this function.

“For that matter because my neighbour is doing retail (lending) very aggressively, I should also start doing retail is not a good policy. You have to have your own capabilities. First prepare the ground, understand the risk, understand the reward and then do it,” he added.

RBI has been sounding early warning bells to banks aggressively pushing retail credit, advising attention to absorption capacity of the borrower and proper monitoring.

Mundra said banks should also put as much emphasis on  human skill gaps and ability mismatch as on their asset/liability mismatch.

Credit in the banking system has declined by 2.9 per cent over a year earlier from this financial year's start on April 1. This is despite RBI cutting rates and banks passing on the benefit. Mundra said there might be some improvement in this.

“From the macro economic data, there is certainly a lot of stability, whether from the viewpoint of current account deficit, inflation, stability of the rupee, growth slightly picking up, various policy measures being taken. So, we should be moving towards major growth,” he felt.