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MUMBAI : Reserve Bank of India (RBI) governor Shaktikanta Das on Friday made it clear that the central bank is not considering a second round of asset quality review (AQR) for banks, as proposed by the Economic Survey 2020-21. He said the central bank is already doing an independent assessment of banks’ non-performing assets, as part of its supervisory process.

“We have really deepened our supervision. In the context of non-banking financial companies (NBFCs), I had said that our supervision is doing a deep dive to get a clear picture about the true state of affairs of non-performing assets. Similarly, with regard to the banks, it is part of the supervisory process. We are doing a deep dive. We are making our own assessment of the true state of NPAs in each of the banks. We are doing what an AQR needs to do. That’s happening as part of the supervision," he said.

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The latest Economic Survey said that the last AQR in 2015 failed to detect lenders evergreening loans outside the formal restructuring process. The effects of such evergreening manifested later at Yes Bank Ltd and Lakshmi Vilas Bank Ltd, two private lenders where bad loans built up to a level where they had to be rescued by the central bank, the survey said.

The survey said another clean-up of bank balance sheets is necessary after the end of the ongoing forbearance. It said that while the last AQR worsened the problems in the sector, it does not mean another round should not be conducted.

Evergreening refers to banks extending fresh loans to delinquent borrowers to help them repay existing loans, hiding the true extent of bad loans. Convinced that only a “deep surgery can discover and root out bad loans", RBI under former governor Raghuram Rajan had ordered a thorough inspection of banks’ books. The exercise led to a significant rise in bad loan recognition, higher provisions and witnessed lenders reporting quarterly losses.

Last year, RBI allowed lenders to offer a six-month moratorium between March and August as a relief measure against the onslaught of covid that left millions without jobs and incomes. Besides, a pending case in the Supreme Court seemingly allowed an informal extension of the moratorium even after 31 August. Bankers believe retail and small business loans will come under a lot of stress in the coming months.

The survey suggested the next AQR must consider all the ‘creative’ ways in which banks can evergreen loans. “In this context, it must be emphasized that advance warning signals that do not serve their purpose of flagging concerns may create a false sense of security. The regulator needs to be more equipped in the early detection of fault lines and must expand the toolkit of ex-ante remedial measures," it said.

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