Regulatory forbearance for banks cannot be a sustained solution to overcome the various problems faced by banks. Elaborate (200 Words)
Refer - Economic Survey V-I Chapter 7
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KEY POINTS
Regulatory for banks means relaxing the norms for restructuring assets, where restructured assets were no longer required to be classified as Non-Performing Assets.
Problems faced by banks
· Non-performing assets, due to dealy in repayment of loans
· Improper credit distribution due to misallocation of resources.
· Focus more on quatittative aspects in distributing loans rather than quality aspects.
Unsustainable
· Banks exploited the forbearance window to restructure loans even for unviable entities.
· The inflated profits were then used by banks to pay increased dividends to shareholders, including the government in the case of public sector banks.
· As a result, banks became severely undercapitalized.
· Undercapitalization distorted banks’ incentives and fostered risky lending practices, including lending to zombies.
· As a result of the distorted incentives, banks misallocated credit, thereby damaging the quality of investment in the economy.
· Firms benefitting from the banks’ largesse also invested in unviable projects.
· In a regime of injudicious credit supply and lax monitoring, a borrowing firm’s management’s ability to obtain credit strengthened its influence within the firm, leading to deterioration in firm governance.
