RBI Warns Banks over High Lending to Retail Sectors and Diversify Loans to Industrial Sector

A recent report released by RBI cited that Banks have shifted major focus on retail loans rather than Industrial Loans. This was majorly due to passive profits. Accordingly, the recent report released by RBI emphasized the need to resume loaning to large corporates instead of confining themselves to low-risk retail loans. However, lack of credit may severely impact the growth of India industrial sector.

Initial Shift from Large Corporate Loans to Retail Loans 

Following the economic shortfall and negative consumer demand, several muddles were consequential. One of the major penalties faced by the banking sector included lack of risk taking. Further, numerous other key factors that contributed to the shift were submissive profitability of industries, low-interest coverage ratio, deleveraging by large industries and the high-risk rates faced by the banks. On facing the strife caused by loan defaulters lenders initiated the swipe.

RBI Suggesting the Swipe Back to Industrial loans 

After the release of Trend and Progress of Banking in India 2018-19, RBI has stated to increase loaning to Industries. According to the report, a surge in retail loans was observed after the decrease in consumption, however, the problem begins when the economic shortfall starts to have an impact on retail loans. Further on, even after the shift, the overhangs remain in the banking sector. Thus, prompting the RBI issuing a statement that warns the scenario of focus on retail loans.

Improvement of the Banking Sector 

As of now, the PSBs and Capital Conservation Buffers assisted in easing the situation. Yet, issues such as resolving the stressed assets, governance, defaulters, and the NBFC crisis must be dealt with utmost priority. Finally, the liquidity framework of NBFCs must be strengthened via initiation of the Liquidity coverage ratio (LCR). The result of this must also emphasize the progress of Banking in the country. Additionally, a positive response could be expected from the banking sector if there is progress in the industrial sector of the country.

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