Reserve Bank of India (RBI) governor Shaktikanta Das has raised a cautionary flag over banks engaging in a “mindless pursuit of bottom lines”. Speaking at an event of the College of Supervisors on Thursday, Das said that profitability must not be pursued by taking unacceptable risks and that RBI tries to sniff out a crisis before one builds up.
He further noted how its timely action has helped mitigate vulnerabilities caused by unsecured loans. While Indian banking seems in the pink of health, Das’s caution is understandable. It has taken a prolonged battle to extricate the sector from a crisis of bad loans that had spillover effects across the economy. A part of this crisis was a result of overexuberant lending in times of economic boom when risks tend to get overlooked.
As these accumulate, though, they can turn into serious problems, threatening to choke credit flow and economic activity. Thankfully, bad loans are now at multi-year lows and bank balance sheets are strong. Credit growth is also booming, although retail rather than corporate lending has led the way. But then again, booms are exactly when we need an alert regulator. Follies of the past must not be repeated.