State-owned lenders which are to receive capital from the government should not take up lending to micro, small and medium enterprises to address problems on their corporate loan books, said former Reserve Bank of India Deputy Governor SS Mundra.
In an interview with BloombergQuint, Mundra pointed out that while the government has asked banks to cut down corporate lending and become more MSME friendly, they cannot become complacent when assessing risk.
Having all this monitoring on corporate loans and believing that SME lending or retail lending are risk free and they don't need any kind of special monitoring or emphasis and they are the panacea for all the ills that banks are facing today would be a big mistake, if committedSS Mundra, Former Deputy Governor, RBI
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The government today said it will infuse Rs 88,139 crore into public sector banks this financial year through a combination of budgetary allocation and recapitalisation bonds. In return, banks would need to become more MSME friendly, while the weaker ones should adopt a differentiated banking strategy, secretary for the government's Department of Financial Services Rajeev Kumar said.
As part of the differentiated banking strategy, these banks should cut down their corporate exposure drastically and focus on lending to segments where they have better capability, he added.
The former regulator, who was a commercial banker for most of his career, also pointed out that it is important for bank boards to fully understand and oversee risk assessment to ensure a good quality diverse book.
The whole emphasis on technology, a strong back-office, your ability to collect, your ability to identify strong borrowers and doing proper risk assessment are as true for retail and SME lending as they are for corporate borrowers.SS Mundra, Former Deputy Governor, RBI
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According to data available with the RBI, of the outstanding industry loans worth Rs 26 lakh crore as on November 2017, micro and small enterprise loans contributed Rs 3.5 lakh crore, while medium enterprise loans were worth Rs 90,000 crore.
Typically, lenders have stayed away from lending to SMEs because of lack of adequate documentation and difficulty in monitoring the loan.
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