Abstention from an “emergency drug” and not from a “basic diet”: Eco Survey
The government must get rid of the forbearance window, provided by banks to borrowers due to the economic challenges induced by COVID-19, as soon as the economy begins to recover because it is just a “drug”. emergency ”and not a“ staple diet, ”the Economic Survey for 2020-21 suggested.
Financial regulators around the world have adopted regulatory forbearance measures to overcome economic challenges posed by COVID-19 and India was not an expectation, said economic study 2020-21 presented Friday ahead of the general budget .
According to the inquiry tabled in Parliament by Finance Minister Nirmala Sitharaman, emergency measures such as abstention prevent the spillover of financial sector failures into the real sector, thus preventing a worsening of the crisis.
“Therefore, as emergency medicine, tolerance occupies a rightful place in a decision-maker’s toolbox … tolerance represents emergency medicine that should be discontinued at the earliest opportunity when the economy is showing a recovery, not a basic plan that goes on for years, ”says Economic Survey 2020-21.
Highlighting the problem of the asymmetry of information between the regulator and the banks, which is accentuated during the abstention period, the survey suggested an immediate asset quality review (AQR) upon the lifting of the abstention.
“The legal infrastructure for loan recovery needs to be strengthened de facto,” he said.
Regulatory forbearance for banks was achieved through measures such as relaxing asset restructuring standards, where restructured assets were no longer required to be classified as non-performing assets (NPA) and no longer required to be classified as non-performing assets (NPA). therefore did not require the levels of provisioning that NPAs attract.
Noting that the current regulatory forbearance on bank loans was necessitated by the COVID-19 pandemic, the survey indicated that during the global financial crisis, forbearance helped borrowers overcome temporary hardship caused by the crisis and helped prevent major contagion.
However, forbearance continued long after the economic recovery, with unintended and damaging consequences for banks, businesses and the economy.
In the current Covid-ravaged scenario, where there is a relaxed provisioning requirement, banks have exploited the forbearance window to restructure loans even for non-viable entities, dressing their books, he said.
Due to distorted incentives, banks have misallocated credit, thus affecting the quality of investment in the economy. The inflated profits were then used by the banks to pay increased dividends to shareholders, including the government in the case of public sector banks. As a result, banks have become severely undercapitalized, according to the survey.
“Thin capitalization has distorted bank incentives and fostered risky lending practices, including zombie lending. Companies benefiting from the largesse of banks have also invested in unsustainable projects. its influence within the company, leading to a deterioration of the governance of the company, ”he added.
According to government data, gross non-performing assets (APM) or bad loans of banks increased from 8.2% at the end of March 2020 to 7.5% at the end of September 2020. In the case of public sector banks, it is increased from 10.25% to 9.4%.
While the ratio of banks’ restructured standard advances (RSA) fell from 0.36 percent to 0.41 percent during this period.
According to the survey, the various measures announced during the pandemic provided relief in asset classification to borrowers, this would affect the true recognition of financial stress on borrowers’ accounts.
Highlighting the impact of forbearance during the global financial crisis, the survey said these policies had wished for short-term economic effects and that GDP growth fell from a low of 3.1% over the past year. the 2009 financial year to 8.5% in two years.
Bank credit growth, which had risen from 22.3% in fiscal 2008 to 16.9% in fiscal 2010, recovered rapidly to reach 21.5% in fiscal year 2010. fiscal year 2011.
“So the time had come to withdraw the forbearance; after all, emergency medicine had worked to restore the health of the economy. However, the central bank decided to continue with the same forbearance continued for five years until ‘in 2015, even when his withdrawal was recommended – an obvious case of emergency medicine that was chosen to be turned into a staple diet, “he said.
After the end of the abstention policy in 2015, the RBI conducted an asset quality review to find out the exact amount of bad debts present in the banking system.
As a result, the APMs disclosed by banks increased significantly from 2014-15 to 2015-16. In the absence of forbearance, the banks preferred the disclosure of the NPAs to the restructuring of the loans.
Thus, the roots of the current banking crisis can be traced back to the prolonged abstention policies followed between 2008 and 2015, the survey pointed out.
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Posted on: Friday January 29, 2021 10:40 PM IST