The Reserve Bank of India (RBI) says to the banks to avoid the frequent ad hoc reviews of credit facilities on businesses. Industry sources said that the RBI guideline comes in the context of concerns that banks charge high differential interest rates and don’t give businesses sufficient financial support.
Concerned about frequent changes in loan facility for companies, on Friday, 21st August 2020, the Reserve Bank asked all borrowers, including urban cooperative banks and small finance banks, to avoid regular ad hoc and short examination of credit facilities without justifiable reasons. Industry sources said the RBI order comes in the context of concerns that banks are charging high differential interest rates and failing to provide sufficient financial support to companies in line with government announcements to help the crisis-ridden industry from time to time. The RBI said some supervisory concerns have emerged from an analysis of the practices followed by the lenders.
The RBI also said, timely and thorough review or renewal of credit facilities should be an integral part of the loan policy and credit risk management process approved by the Board, and banks should avoid regular and repetitive ad hoc or short review or renewal of credit facilities for no justifiable cause. The RBI said that a study of the lenders’ activities has brought out some supervisory issues, including frequent and repetitive ad-hoc inspection of credit facilities rather than routine examination.
As per a risk management program circular in banks, scheduled commercial banks are required to develop a credit policy approved by the board that prescribes the periodicity and methodology for reviewing and renewing credit facilities. The policy should also prescribe differential time schedules for reviewing and renewing borrower limits so that lower-rated borrowers whose financials show signs of problems
RBI said that Banks are required to have and they must adhere strictly to a comprehensive board approved policy on methodology and periodicity for evaluating and renewing credit facilities under the overall regulatory guidelines. The central bank demanded that banks must collect all data relating to the routine and ad hoc review of credit facilities in their core banking management information systems and make it available for inspection as and when demanded by auditors or RBI. Furthermore, it added that the processes regulating the review or renewal of credit facilities should be included in the framework of the audit control mechanism. RBI also added that they advise in letter and spirit that all banks will obey the instructions above.
