Mundra warns against herd mentality in banking

At a time when credit offtake has hit a multi-year low last fiscal, Reserve Bank deputy governor S S Mundra today cautioned banks against irrational lending, saying they should not have 'follow thy neighbour' policy.
"Follow-thy-neighbour is not a good policy in banking. You cannot say that because someone else has done (lent) so everything must be alright and I too will lend," Mundra said while launching a book on Bank of India here this evening.
Asking the banks to follow their own processing and prudential norms before lending, he said he is not referring to consortium lending which is a structured thing and where lenders come and arrive at common framework.

In FY15, banks' credit grew at 12.6 per cent while deposit grew 12.8 per cent.
On a fortnightly basis, loans grew by 10.16 per cent in the period ended May 15 and deposits increased by 11.85 per cent, as per the RBI data.
Asked whether the 'follow-thy-neighbour' trend is one of the reasons for massive surge in bad loans, he said there are multiple reasons for increase in bad loans.

Talking about other areas from where banks should learn from the history, Mundra highlighted outsourcing of services.
"From the time when we started and what we do today, outsourcing is a very important function... You have to really concentrate on your core competency. But I would say processing for lending is not an activity which should be outsourced," he said.

On low credit growth, Mundra said it is too early to look at the numbers as the first quarter is always sluggish. Lower interest rates could trigger higher credit off-take, but interest rates are not the only reason for credit pick-up or decline, he said.
"First pre-requisite for borrowing is there has to be a need, there has to be a project. Then comes the question of whether you borrow at this rate or not," he added.