The Economic Survey has called for discontinuation of loan forbearance as soon as economy recovers, and sought an asset quality review of banks immediately after the withdrawal of forbearance.
Financial regulators across the world, including India, have adopted regulatory forbearance to address the economic challenges posed by COVID-19 pandemic, the Economic Survey 2020-21, tabled in the Parliament by Finance Minister Nirmala Sitharaman on Friday, said.
Calling it a legitimate policy tool, the Survey said emergency measures such as forbearance prevent spillover of the failures in the financial sector to the real sector, thereby avoiding a deepening of the crisis. However,"forbearance represents emergency medicine that should be discontinued at the first opportunity when the economy exhibits recovery, not a staple diet that gets continued for years," it said.
In simple terms, forbearance refers to relaxation in norms for restructuring stressed assets of banks.
Saying that prolonged forbearance is likely to sow the seeds of a much deeper crisis, it said, the policymakers should lay out thresholds of economic recovery at which such measures will be withdrawn, and the same should be communicated to banks so that they can be prepared for it.
"Given the problem of asymmetric information between the regulator and the banks, which gets accentuated during the forbearance regime, an Asset Quality Review exercise must be conducted immediately after the forbearance is withdrawn," the Economic Survey said.
The Asset Quality Review must account for all the creative ways in which banks can evergreen their loans, it said.