Reserve Bank deputy governor SS Mundra today warned banks against their excessive focus on retail lending, saying that the segment cannot be the panacea for growth and that too much of retail lending will also create its own problems.

“Whatever has happened in the corporate financial world in the past couple of years, probably now everyone is moving towards retail lending. But retail banking cannot be a panacea for credit growth”, Mundra said at an event today.

He also said too much focus on retail lending will create its own problems.

Banks, facing tepid credit growth, of late have been focusing on retail books due to sluggish demand from corporates, who have stretched balance-sheets and also higher number of loans turning bad given to large borrowers.

The deputy governor however said if banks really want to play it big in retail then they must have lots of back office preparedness and robustness.

“Without these two requisites, a massive entry into retail area can create its own problems,” he warned.

Mundra said though RBI has introduced a host of measures like 5:25 refinance scheme, JLF, SDR to deal with NPAs, along with stressed restructured accounts crossing 13 per cent, there is a need for strong bankruptcy code to address the issue.

“These (5:25 refinance scheme, JLF, SDR) schemes are all the second best options. The most efficient option would be to have an effective bankruptcy code, which we don’t have currently”, he added.

The government is working in this direction and soon a final outcome on code will come, he said.

Talking about the challenges in the banking sector, he said the sector is facing issues related to asset quality, capital adequacy, high corporate leverage and also higher level of unhedged forex exposures.

Mundra further said banks should get rid of asset quality issues as soon as possible because this will enable them to take advantage of growth as it is slowly started.

“Due to the easy money policies of the developed economies in the last few years, there was abundance of cheap credit available and I think many corporates have moved to convert their domestic currency into the forex borrowing without caring to really hedge for it.

“Now when it is looking that interest rate cycle is about to turn, it would have its own implication on the exchange rate, currency valuation”, he said.

Mundra said human resource is going to be a bigger challenge that banks are facing now and this is likely to increase going ahead.

He said with two new universal banks starting their operations, 21 new entities for differentiated banks being given in principle approvals and with RBI working towards giving on-tap licences, HR is going to be a challenge for the industry, particularly for public sector banks.

“The retention, skilling, talent identification, grooming, mentoring the whole host of HR area has to assume a lot of significance in the banking system”, he said.

Mundra said with the growing trends around the globe like terrorist activities and various kinds of scams, the sensitivity towards the KYC and anti-money laundering measures has to become more robust.

“Leaving all these to individual operating units will not be sufficient. All the banks and other financial institutions will have to develop very strong surveillance system which operates as a second layer from their respective offices”, he said.

He said banks need to improve their customer services. RBI has came out with a charter of customer rights which is given to banks to adopt on voluntary basis.

“We have given a window of 18 months (for adopting customer charter) and after that we will see how it is being pursued and may be if required take some measures in that area”, he said.

Talking about the economy, Mundra said the domestic economy is faring better and is likely to grow at 7.3 per cent this year, even though this is a below potential growth.

He said there are various estimates on the potential growth with some saying that it is 9 per cent while some suggesting a double-digit growth.

“My point is that whatever that magic number may be, the fact remains that there is a big degree of unanimity that our economy is currently growing below its potential”, Mundra concluded.


By Adam