Risk aversion rising in banks, may hinder recovery if taken to extreme: FSR

Public sector banks chose to lend only to high-quality borrowers; there was a sharp credit contraction across all rating categories except 'AA and above', FSR points out

The risk aversion in extending credit, which grips public sector banks (PSBs), seems to be spreading to private lenders as well. This tendency, in an extreme case, may have an adverse effect, especially on the economic recovery prospects, according to the Financial Stability Report released by the Reserve Bank of India on Friday.

Policy measures have so far kept financial markets from freezing up, and eased liquidity stress facing financial institutions and households. Consequently, borrowing costs have ebbed and illiquidity premia have shrunk. Nonetheless, risk aversion and lacklustre demand have impeded the fuller flow of finance from both banks and non-banks