2015 And 2021 Are Completely Different, Says Rajnish Kumar On AQR 2.0

Since the last asset quality review, the Reserve Bank of India and the banking sector have moved miles in adopting a more standard approach in recognising bad loans, according to Rajnish Kumar, former chairman of State Bank of India.

Speaking to BloombergQuint over phone, Kumar said the calls for a fresh asset quality review of bank balance sheets, also suggested by the Economic Survey 2021, may not lead to damaging results for the sector. Moreover, unlike the last forbearance regime, banks this time are far more proactive and deal with enhanced supervision from the regulator. These factors have ensured that the mistakes of the past are not repeated.

Here are edited excerpts of the conversation with the former SBI chairman:

The latest economic survey has called for a fresh asset quality review of bank books after the Covid-related forbearances are removed. Do you think the sector needs this?

2015 and 2021 are two completely different years when it comes to the asset quality of banks. The way things are placed now, the regulator’s tolerance for under-reporting of bad loans is completely zero. Bankers have also become far more proactive in recognising bad loans and providing for them. If you take the current Covid crisis and the dispensations available to borrowers, you will see that banks have been making proactive provisions, irrespective of asset classification. The chances of finding problematic assets on bank balance sheet is quite low. Now if the regulator wants to enhance scrutiny on banks, then that’s a different matter altogether, but it is also fine.

What was the motive behind the first AQR and how successful was it?

For this you have to look at the context under which the last AQR happened. In 2015 you had a bulk of corporate accounts which were not recognised as NPA owing to the strategic debt restructuring scheme. Moreover, there was a need for standardisation in reporting of NPAs by the entire system. Borrowers used to use this loophole to borrow from one bank and repay the other, without the system coming to know about the account having gone bad. The AQR put an end to all this by ensuring that a standard is maintained across the sector, as far as recognition is concerned.

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How different is bad loan recognition at banks now, as compared to 2015?

The regulator has mandated that all banks must fully automate their NPA recognition system. This ensures that a discretionary call cannot be taken anymore. Even if some small banks or NBFCs have not fully automated the system, the regulator can always conduct individual supervisory reviews of their accounts. Besides, the standards of RBI’s supervisory review has gone up considerably. There is also weekly reporting of account wise information to the CRILC (central repository for information on large credit) framework, which has made a huge difference. If you take all these things into consideration, it is very difficult to game the system now.

Now if someone wants to deliberately do something mischievous, then regulations cannot stop them. But the RBI has enough powers in its arsenal to deal with such cases.

The Economic Survey also talks about a rise in zombie lending in the previous forbearance regime, which needs to be avoided during the Covid-crisis. Do you think banks are geared up to avoid lax lending practices?

The restructuring schemes which RBI has introduced in the last few years had ensured that this problem does not take place. In the previous restructuring schemes such as CDR (corporate debt restructuring) and SDR, there was a incentive for banks to continue maintaining an account as standard. The scheme introduced in June 2019 completely takes this benefit away, since the account automatically becomes NPA as soon as it’s restructured.

Even in the Covid-19 package that the RBI announced, the banks are required to make upfront provisions to ensure that they can avoid the classification downgrade. The incentive is now geared toward quick recognition and recovery of provisions. We are no longer in the “kaam chalau” era of banking and the credit of that must go to regulators and the government. If the regulator is completely clear on the need for better management of books, bankers cannot afford to be lax.

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