ASSET QUALITY REVIEW OF NBFC

 

For: Mains

Topics covered:

• What is Asset Quality Review – its need, objectives, significance and advantages.
• What are NBFCs

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News Flash

RBI Governor ruled out ordering an asset quality review (AQR) of non-banking finance companies (NBFCs) that are facing a credit squeeze and mismatch between assets and liabilities.

There was no proposal to conduct an asset quality review (AQR) of non-bank finance companies that are facing a credit squeeze since the collapse of infrastructure financier Infrastructure Leasing & Financial Services (IL&FS) in August last year.

• Last asset quality review for banks is done by RBI in late-2016 and early-2017. Under the review, it identified 40 stressed accounts and asked banks to refer them for bankruptcy resolution.
• Another 50 NBFCs and housing finance companies (HFCs) are being closely monitored.
• Monitoring includes all aspects of the functioning of NBFCs such as their stability, capital adequacy, their cash inflow and outflow.

 

Causes of funds Crunch

• The NBFC sector is facing serious financial pressure after the dramatic default by the Mumbai-based IL&FS.
• IL&FS has led to crisis in the NBFC sector that was reflected in the performance of financial institutions.

 

Objective

• The objective of the RBI is to harmonise the liquidity requirements for banks and non-banking finance companies.
• RBI to have an optimal level of regulation and supervision so that NBFCs are financially resilient and robust.

 

What is asset quality review (AQR)?

Reserve Bank of India (RBI) inspectors check bank books every year as part of its annual financial inspection (AFI) process. This was named as Asset Quality Review (AQR).

Under, Annual financial inspection, 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.

Such a special inspection was conducted in 2015-16 in the August-November period.

 

Why AQR is necessary?

• The RBI believed that asset classification was not being done properly.
• Banks were postponing bad-loan classification.
• Banks said, don’t call our loans bad even if it has not been paid for three years. Allow us to postpone recognition.
• Investors were also facing uncertainties as guidance by banks on bad loans was erratic.

 

Impact of AQR

• The AQR created widespread destruction on banks’ profit & loss accounts. Many large lenders slipped into losses.
• Record losses were posted in Q4 of FY16 by many large banks.
• Bad loans in the Indian banking system jumped 80 per cent in FY16, according to RBI data.

 

Way ahead

• RBI will ensure that no large NBFC collapse.
• RBI will take necessary steps to maintain financial stability in the short, medium and the long-term.

 

Source: Business Today

 

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