Public Sector Banks Poised to Enhance Loan Risk Assessments

According to the most recent financial stability report from the RBI, there has been a significant compound annual growth rate of 24.8% in bank retail loans between March 2021 and March 2023. The Reserve Bank of India has raised concerns about signs of stress in the retail loan segment, prompting the government to request state-run banks to enhance their loan risk assessment parameters. Additionally, it has requested their attention towards acquiring high-quality current and savings accounts.

Banks will conduct regular stress tests and implement risk-based profitability models across all loan portfolios. The government nominees serving on the bank board will also ensure that stress analysis reports are included in the agenda and discussed during all relevant board meetings. As part of their strategy, banks will leverage technology to enhance automation in all areas, including back-office operations. Banks will enhance their underwriting processes and expand the use of early warning systems (EWS) to detect and proactively engage with high-risk borrowers. This will help prevent the accumulation of bad debts.

A strategy will be developed based on the strengths and capabilities of each bank, with a specific focus on monitoring and managing bad loans while ensuring a smooth flow of credit.