SBI's managing director C S Setty on Friday pitched for banks to have an oversight on lending practices of borrowers from the non-bank lenders' segment.
Speaking at a conference organised by industry lobby grouping IMC, he said non-bank lenders should follow the same risk underwriting and credit monitoring principles as done by larger banks from whom they borrow money.
He said a good proportion of banks' lending comprises lending to Non Banking Finance Companies (NBFCs) or Micro Finance Institutions (MFIs), and while the bank books may look clean from the outside, it may not be a proper representation of the incipient stress if any.
"...the lending practices of these institutions which are borrowing from us, I think the banks have to have oversight on that," Setty told reporters, adding that the issue is "not serious".
Banks which have access to low-cost deposits often get into on-lending arrangements with smaller entities like NBFCs who have a better reach, wherein the NBFCs execute an entire loan that ultimately flows from a bank's balance sheet.
"I think we don't want them to take undue risk, which will eventually land in our lap right, which has happened in the earlier cycles, right?" Setty said, conceding that the RBI is keeping tabs on this aspect of risks in NBFCs.
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A banker's job is to assess the risk, mitigate it and price it, Setty said, adding that in the last five or six years, NBFCs have taken a lot of loans. He also made it clear that bank lending to such entities should not be seen as one to the financial sector, because ultimately it reaches the real sector of the economy.
"If you take MFIs, what are the governance standards which they are following? And NBFCs, what is the assessment and the quality of standards which they are applying while underwriting. These two have an aggregate risk impact on the banking sector because we are the largest lender to both the NBFCs and the MFI sectors," he said.
Setty also said that SBI is not aggressively looking at increasing the 65,000 business correspondent network it has at the moment, but will focus more on urban and metros for expanding the network.
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