NEW DELHI: In a bid to get a clearer picture of the banking system asset quality, the Economic Survey has called for a fresh review of asset quality of banks after the Covid-19-related regulatory forbearances are removed.
Criticising the Asset Quality Review (AQR) of 2015-16 that the Reserve Bank of India had undertaken under Governor Raghuram Rajan, the Survey said it under-estimated the extent of bad loans and the resultant capital infusion that was required to ensure that the bank balance sheets indeed become healthy, exacerbating problems in the sector created by forbearance post global financial crisis.
“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banks, which gets accentuated during the forbearance regime, an AQR exercise must be conducted after the forbearance is withdrawn,” the Survey said.
The exercise, if it happens, will have huge implications in the banking system. A bad loan clean-up will mean banks will see a sharp spike in bad loans from the current level. As of September last year, 7.5% of the loans are tagged as gross non-performing assets and the GNPA ratio is expected to rise to 13.5% in September this year.