“The first lesson for policymakers is to treat emergency measures as such and not to extend them even after recovery: when an emergency medicine becomes a staple diet, it can be counterproductive,” the survey stated.
After the onset of the Covid pandemic in April of last year the RBI introduced key regulatory measures that included a six month moratorium on loan payments. At the close of the moratorium the RBI also introduced a one-time restructuring scheme, where restructured assets were no longer required to be classified as bad loans and would not require the levels of provisioning that NPAs attract.
The survey noted that the prolonged forbearance policies following the global financial crisis engendered the recent banking crisis that brought down investment rates and slowed economic growth in India.
It also added that while forbearance helped borrowers tide over temporary hardship caused due to the financial, it continued for seven years though it should have been discontinued in 2011.
“The forbearance continued long after the economic recovery, resulting in unintended and detrimental consequences for banks, firms, and the economy,” the survey noted. “Given relaxed provisioning requirements, banks exploited the forbearance window to restructure loans even for unviable entities, thereby window- dressing their books.”
The survey noted that lenders used the option of restructuring loans that were on the verge of defaulting without regard to the viability of such loans. As per an analysis, on an average bad loans from accounts that were resolved late was three times more than those where prompt action was taken.
The economic survey also blamed shoddy lending and said that prolonged forbearance could lead to distortionary practices by bankers.
“Forbearance provides incumbent managers an opportunity to window-dress their balance sheets, show good performance during their tenure, and thereby enhance post-retirement career benefits,” it said.
The economic survey also hinted at recent episodes at Punjab National Bank, Yes Bank and Lakshmi Vilas Bank and said that bank management’s could use forbearance as a shield to cover up corruption and nepotism.
“The events with the Punjab National Bank or recent allegations of deceit against former bank CEOs corroborate this possibility,” the survey noted. “Notice that forbearance allows banks to hide bad loans by delaying the recognition of losses. Bank managers, therefore, foresee very little downside in making unviable loans to connected parties, against the upside of making quick personal gains.”