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Concerns on banks ‘mispricing’ risks: SBI Chief

Dinesh Kumar Khara, Chairman, State Bank of India on Friday said that mispricing of risk by banks was a cause of concern. Though banks have tightened the underwriting standards, the surplus liquidity in the system may push banks to a situation where they end up mispricing the risk.

“There is temptation on bankers to go down the risk curve and misprice the risk……we are starting to see this,” Khara said at the Financial Market e-Conclave organised by the Bengal Chamber of Commerce & Industry here on Friday.

The SBI Chairman does not feel there is any concern regarding the underwriting standards as most banks have tightened norms following the previous experience of decline in asset quality and high NPAs.

The system is flush with liquidity given the low credit offtake due to slowdown in economy on the back of Covid-19 pandemic. The funds parked with the RBI, in its reserve repo window, is estimated to be around ₹7 trillion, while the government’s cash balances with the central bank is close to ₹3.4 trillion.

Credit offtake to pick up

According to Khara there are greenshoots visible in certain sectors including commodities, iron and steel and aluminium. Credit demand is expected to pick up once investments start flowing into these sectors. “We have started seeing traction (in credit demand) from public sector enterprises and some private sector companies are also coming for fresh investments,” he said.

He said there was some stress in the retail portfolios at the end of Q1FY-22 on account of the regional lockdowns. However, things have been improving since the beginning of Q2.

On reduction of rates on new home loans, he said that the mortgage market has started showing signs of growth and banks are trying to capture the same.

‘Status quo likely’

“Inflation is mainly on account of supply side disruptions and once that is addressed we may have elbow room for keeping the rates at current level and wait for growth to come back in full force and at that point of time the central bank might think of recalibrating interest rates. But at this point of time it looks like interest rates should remain as it is,” he said.

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