May 31st, 2016
The Vijay Mallya episode put into limelight the stressful times banks are going through especially the public sector banks. The Public Sector Banks have reported record losses largely owing to bad loans also called as NonPerforming Assets. Taking stock of the situation the RBI governor embarked on a program that seeks to fix the problems for good. Mr. Rajan initiated the Asset Quality Review (AQR) through which the RBI has asked the banks to report the stressed loans or even partially defaulting accounts as Non – Performing ones.
What is AQR? What has been the outcome of AQR?
AQR is a review exercise by which the RBI had asked the banks to report even the stressed loans and defaulting accounts as Non- Performing Assets (NPA’s) in addition to the already failed loans declared by the banks.
The AQR exercise has unearthed numbers and conclusions that are a cause for worry. However, the outcomes how damning it is should be considered as a part of a longer overhaul that would keep the banks healthy.
Some of the findings of the AQR are:
1. A watchlist of potentially bad loans has been unearthed. The banks which have reported the high amount of potentially bad loans includes ICICI.
2. Axis Bank had reported a high percentage of potentially bad loans during the AQR exercise.
3. The RBI governor has confessed that the earnings of state-run banks do not look ‘pretty’.
4. The findings of the AQR have caused the public sector banks market capitalization to drop due to the poor numbers.
5. The RBI has also asked the banks to clear their balance sheets by 2017. Though it is tough, it is very much necessary for the long term health of the public sector banks.
The Logical Indian welcomes the AQR exercise which the RBI governor has undertaken. The AQR has without a doubt exposed the deeper split in the banking sector. Prevention is better than cure and it is on those lines the banks should comply with the guidelines of RBI and clean up their balance sheets. In a volatile global market, it is very important that the financial sector is healthy which is not the case right now. But certainly the banking sector is not at a point of no-return and the AQR exercise should secure the mid-term stability of the banks.