The Economic Survey 2021 has called for a fresh review of asset quality of banks after the Covid-19-related regulatory forbearances are removed.
The regulatory forbearance must be removed as the economy improves and must quickly be followed up by a clean-up exercise of bank books, Chief Economic Adviser Krishnamurthy Subramanian said in the Economic Survey for 2020-21, released before the union budget presentation on Feb. 1.
“Given the problem of asymmetric information between the regulator and the banks, which gets accentuated during the forbearance regime, an AQR exercise must be conducted immediately after the forbearance is withdrawn,” the survey report said.
The survey report also suggested the following steps to avoid another banking crisis, after the Covid-related provisions are removed:
- New AQR must cover all creative ways in which banks evergreen loans.
- The RBI must be better equipped to find early fault lines and have an expanded tool kit in its remedial measures.
- The RBI may consider penalising bank auditors, if evergreening is discovered.
- AQR must be immediately followed up by a mandatory recapitalisation exercise.
- Need to strengthen bank boards to avoid evergreening of loans and zombie lending practices.
- Ex-post analysis of measures taken during a crisis must not equate bad judgement to malafide intent.
- Judicial infrastructure for the implementation of Insolvency & Bankruptcy Code — comprising debt recovery tribunals, National Company Law Tribunal, and appellate tribunals must be strengthened substantially.
New AQR Unlikely To Find Any Holes
Bankers believe that the suggestion for a new AQR is not as troubling as it was in 2015. According to current and former bank officials, the last review made sure that the problems in banking system, whether it be quality of assets or lending practices, were more or less dealt with.
“Between the AQR of 2015 and now, a lot of recognition has happened. There is a lot of active supervision that happens in the banking system. Because of the reporting we do and the way banks are run, it may not be as bad a surprise as in the past,” Ramaswamy Meyyappan, chief risk officer, IndusInd Bank told reporters over a conference call on Friday, after announcing the bank’s third quarter results.
Bankers say there have been multiple changes in the regulatory ecosystem and banking sector since 2015.
“Since the last AQR there has been a concerted effort from the regulator and banks to enforce greater control over troubled assets on balance sheets. The effects of that is visible in things like divergences reported by banks,” said Arijit Basu, former managing director, State Bank of India.
According to Basu, the information arbitrage between the lenders and borrowers and, by extension, the regulator, has come down in the last few years. Banks have been monitoring individual assets more closely and the insolvency law has also helped in better quality recognition of bad loans. However, Basu agrees that regulatory dispensations should be removed at the earliest.
Sunil Srivastava, former deputy MD at SBI noted that since the last AQR it is unlikely that banks would be resorting to much ever-greening.
“Lending to mid-sized corporates who do not have the ability to continue their business under the pandemic and also do not have adequate legal support to resolve the stress should not be mischaracterised as ever-greening,” Srivastava said.