‘Khate mein likh lo’ - AQR 2.0 and NPAs (Part 2)

Written by - Vibhav Bhat and Yash Prashant Bhave

PGDM Finance- TAPMI, Manipal

In previous article we discussed the NPAs of banks in detail. We saw what are NPAs, consequences of holding NPAs for banks and how do they deal with them. In this article we will look at Asset Quality Review (AQR) in depth. Understand why RBI had to do AQR in 2015 and do we really need AQR 2.0 post moratorium period.

Why AQR (Asset Quality Review) for banks?

The idea behind conducting the AQR (Asset Quality Review) is that it will make the system transparent and indirectly will help banking systems in the longer run. The process was carried out by the RBI and its appointed regulators in 2015. They scrutinized qualitatively and quantitatively factors to identify the loan status in the banking sector then. It was crucial in identifying bad loans and classify NPA in the 2015 review. Also, from the results of this activity, public sector banks became victims as it hinted them to be bad performers in comparison to private banks.

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Impact of AQR

The AQR activity of 2015 basically brought out the techniques that banks used to misclassify their accounts. The NPA suddenly shot up in the year when AQR was conducted and actual NPAs were brought to the surface. The PVBs (Private sector banks) however showed resilience and it seemed like PSBs (Public sector banks) were worse off as compared to private counterparts. However, the research analysis following AQR showed this was not a fact.

Post AQR RBI has been introducing stringent regulations for banks to follow on their assets to identify them before a banking sector crisis resulting from it. AQR 2.0 is being thought by analysts would be conducted in 2021 post moratorium and pandemic period to identify the impact and correctly classify the assets rather than leaving it completely to banks.

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AQR 2.0 really needed?

Since the last AQR conducted there have been major changes have taken place in the banking sector. Identification of NPAs and distress accounts have been structured better than the system prevailing then. There have been mechanisms put in place to review the signs of stress of assets of banks so that timely intervention and resolution plans can be put in place to regularize the account.

If an AQR is conducted in the current period, the benefits derived by the activity are hence expected to be minimum. The regulations discussed are already in place for the central bank to review the asset qualities of banks and provide in-depth details of the same to them. Shaktikanta Das on the 5th of February 2021 made it clear that currently the systems are supposed to be holding good for controlling NPAs and the central bank is not planning for AQR 2.0.

However, the economic survey 2020-21 suggested another AQR needs to be performed. As per the survey, it suggested the central bank must review the true status of the borrower accounts as soon as the forbearance that has been provided ends. The forbearance period was extended to Aug end recently post which we might see the true situation in the banking sector when the classification of assets takes place. As per the economic survey the banks have been exploiting this period showing lower NPAs and the actual number might be worse than RBIs prediction of 13.5%.

In either case, our suggestion on this issue is to perform another AQR. This will bring forth the true conditions in this sector early on. The resources expended on this should be considered as a preventive measure taken to avoid dire issues in the future in this critical segment of the economy. A delayed response might further create complications in the already tensed Indian economy battling with pandemics.

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