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Economic Survey 2021 calls for another asset quality review, says forbearance can't stay for long

This statement in the survey is significant since a bad loan clean-up will mean banks will see a sharp spike in bad loans from the current level.

January 29, 2021 / 04:14 PM IST

The biggest takeaway for the financial sector in the 2021 Economic Survey, ahead of the Union Budget on February 1, is the call for another asset quality review (AQR) in the banking system. If this happens, it will have huge implications in the banking system in terms of capital requirement and bad loan trend.

“A clean-up of bank balance sheets is necessary when the forbearance is discontinued. Note that while the 2016 AQR exacerbated the problems in the banking sector, the lesson from the same is not that an AQR should not be conducted,” the Economic Survey said.

“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gets accentuated during the forbearance regime, an AQR exercise must be conducted immediately after the forbearance is withdrawn,” the survey said.

This statement in the survey is significant since a bad loan clean-up will mean banks will see a sharp spike in bad loans from the current level. As on September 2020, around 7.5 percent of the bank loans is tagged as gross non-performing assets (GNPAs). Banks need to set aside money to cover bad loans that impact their profitability.