Credit is the most essential ingredient in market economies but the provision of credit which inevitably involves risk taking should make the commercial banks aware of the excessive credit growth, according to a top Central Bank (CB) official.
"In Sri Lanka the private sector credit grew at an unusually high rate of 35 % in 2011 and it is still continuing. In the context of excessively high demand for credit, financial institutions have to ensure, quality of assets or quality of credit is in high standard, concentration risks is minimal, proper diversification of portfolio, credit assessment techniques are adequate, post monitoring efforts are strengthened and finally, the possibilities to develop credit bubbles one alerted," Chandra Premaratne, Deputy Governor CB told the Business Times on the sidelines of a seminar on "Credit Evaluation & Risk Analysis" held in Colombo this week.
She added that credit growth in some banks is over 40 % and this is driven by high demand for credit influenced by high economic growth, relaxed monetary policy, coupled with low interest rates, availability of high liquidity, etc.
"Financial intermediaries have to manage risk efficiently to avoid bank runs, collapses in financial markets and also to avoid instability in the financial system as well as in the economy," she told an eminent audience during a presentation. She added that in the case of financial institutions, it is not only credit risks they need to handle, there are other risks such as operational risks, arising from day to day operations, market risks, cropping up from the business environment, financial risks, like liquidity risk, legal risks, from the various legally binding agreements, systemic risks associated with systems and procedures, etc.
"The important point is financial institutions need to implement sound policies and procedures for credit risk management, identify risks, measure risk, understand interlinks between various other risks and credit portfolio risks, monitor risks and manage risks."
Ms. Premaratne added that while most of the risks can be evaluated, identified and monitored, sometimes it can be unforeseen or a sudden occurrence without giving early warnings. "The most important thing is that the financial institutions have to be alive to risk; be vigilant, and should be equipped to handle any type of risk. In overall credit management process, the efforts of the financial institutions should be supported by two main parties. First regulators by providing sound regulatory framework and through close supervision, ensuring capital adequacy to cover risks, and second, policy makers by giving correct policy signals and directions to the stakeholders," she explained. She also highlighted that the overall credit risk management is a combined effort of all concerned. |
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