The Reserve Bank of India today suggested that an "early end" to regulatory forbearance may be the "right step" and said repeated leniency leads to "moral hazard".
The central bank's remark comes amidst banks asking for an extension of regulatory forbearance by one year.
Banks are allowed to qualify restructured assets as standard under regulatory forbearance which will cease to exit from April 1 next year.
Provisioning for bad loans after April 1 will increase to 15 per cent from 5 per cent, putting pressure on their profitability.
"While it may be somewhat legitimate to justify regulatory forbearance in times of major crises, forbearance for extended periods and as a cover to compensate for lenders or borrowers' inadequacies engenders moral hazard," the RBI said in its Financial Stability Report.
It may be noted that RBI Governor Raghuram Rajan earlier in November had said: "The RBI opposes forbearance which simply pushes problems into the future, while it will allow more flexibility so that problem loans can be dealt with effectively today."
"With the initiation of risk-based supervision and implementation of Basel II advanced norms for credit, RBI said, accounting discretions such as restructuring would have no impact on capital requirements since such processes incorporate capital provisioning based on expected losses ...." the RBI report said.
"Hence, an early end to regulatory forbearance may be the right step," it suggested.
RBI also raised a concern over the extent of restructured assets in the banking sector, especially at state-owned banks.
Even in 'business as usual' conditions as against 'stressed conditions', any restructured advance carries much higher probability of turning into non-performing asset (NPA) than a standard asset," it added.
It said from the capital adequacy perspective, banks need to factor in the relatively higher possibility of slippages in restructured standard advances.
The report said since banks, traditionally have been short term working capital providers, their appreciation of idiosyncratic risks in infrastructure projects seems to have been inadequate.
