Monetary policy: RBI doing exactly what AQR does, though unofficially

The Reserve Bank of India (RBI) is making its own assessment of the true state of non-performing assets (NPAs) in the banking system as part of its supervisory function. In essence, it is actually an asset quality review (AQR) of the banking system, without officially being called that.

In the post-policy press meet, RBI Governor Shaktikanta Das said, “We are making our own assessment of the true state of NPAs in each of the banks. So, we have a sense of the overall situation. We are exactly doing what an AQR needs to do as part of our supervision”.

“In the last two years or so, we have really deepened our supervision,” he added.

The Economic Survey, last week, had suggested that there should be one more round of AQR of banks after the Covid-related forbearance is over.

Das said RBI is collecting data from all banks on the size of bad assets. “We are constantly monitoring the impact of standstill on asset classification and the impact of Covid-related resolution framework. All this data is coming to us on a daily basis. So, we will have a clearer picture as we move ahead,” he said. In case of shadow lenders, Das said, the supervision team is doing a deep dive to get a sense of the true state of affairs with regard to NPAs.

He said RBI is happy with banks’ proactive approach to making provisions in anticipation of higher NPAs. “There is wide realisation in the banking sector that they need to provide adequately for the buildup of stress,” he said.

NPAs have reduced in the banking system in the last few years as banks have recognised bad loans aggressively, made provisions for them and recovered a great deal from legacy accounts due to the insolvency law. The NPAs in the system moderated from its peak in March 2018 to reach 7.5 per cent by the end of September 2020.