Asset quality review of NBFCs ruled out
- A liquidity squeeze that began with repayment defaults by IL&FS began a downward cycle in the economy. Since then repayment worries have gripped big companies like Dewan Housing, Zee Group and Anil-Ambani led Reliance Group.
- Bank credit to NBFCs fell by over Rs 6000 crore between March to June once again highlighting the risk aversion towards the sector. Credit disbursals by non-banking finance companies plunged by a third in the year to March raising worries over solvency issue gripping other NBFCs after the implosion of IL&FS in September last year.
- The country’s largest lender State Bank of India took the lead and introduced repo-linked lending rate for home loans from July only for new customers who are getting the direct benefit of lower policy rates.
- Das once again appealed to banks for a faster transmission of policy rates to push-up credit in the Indian economy.
- Today, the economy requires a certain amount of push not just from the monetary policy but also from its transmission, our expectation is that they (banks) should move faster.
What is an AQR?
- Typically, Reserve Bank of India (RBI) inspectors check bank books every year as part of its annual financial inspection (AFI) process.
- However, a special inspection was conducted in 2015-16 in the August-November period. This was named as Asset Quality Review (AQR).
- In a routine AFI, a small sample of loans is inspected to check if asset classification was in line with the loan repayment and if banks have made provisions adequately.
- However, in the AQR, the sample size was much bigger and in fact, most of the large borrower accounts were inspected to check if classification was in line with prudential norms.
- Some reports suggest that a list of close to 200 accounts was identified, which the banks were asked to treat as non-performing. Banks were given two quarters, October-December and January-March of 2016 to complete the asset classification.
- RBI had a strong notion that some of the banks are underreporting their NPAs.
- Asset classification practices are not up to the mark and several banks have resorted to evergreening of accounts.
- Here, banks were postponing bad-loan classification while depicting accounts as performing.
- Non-banking financial companies (NBFCs) are entities or institutions that provide certain bank-like and financial services but do not hold a banking license.
- NBFCs are not subject to the banking regulations and oversight by federal and state authorities adhered to by traditional banks.
- Investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds, and P2P lenders are all examples of NBFCs.
- Since the Great Recession, NBFCs have proliferated in number and type, playing a key role in meeting the credit demand unmet by traditional banks.