Page 219 - ES 2020-21_Volume-1-2 [28-01-21]

202 Economic Survey 2020-21 Volume 1

are associated with distortionary practices during their tenure. Forbearance provides
incumbent managers an opportunity to window-dress their balance sheets, show good
performance during their tenure, and thereby enhance post-retirement career benefits.
Consequently, bank managers resort to distortionary practices under forbearance. Second,
banks’ management may use forbearance as a shield to cover up outright corruption and
nepotism. The events with the Punjab National Bank or recent allegations of deceit against
former bank CEOs corroborate this possibility. Notice that forbearance allows banks to
hide bad loans by delaying the recognition of losses. Bank managers, therefore, foresee
very little downside in making unviable loans to connected parties, against the upside of
making quick personal gains.

Box 2: Regulatory Forbearance provisions

1. As per regulations prevalent before August 2008, non-industrial non-SME accounts
classified as ‘standard assets’ were to be re-classified as ‘sub-standard assets’ upon
restructuring. The new relaxed norms entitled borrowers to retain the same asset
classification upon restructuring, subject to a few conditions.

2. Since accounts would no longer be classified as sub-standard on restructuring, banks
were no longer required to make the general provision on total outstanding for
substandard assets.
3. The relaxed norms were extended to already restructured loans as well. Note,
before 2008, only loans with no prior history of restructuring were considered for
restructuring. Below is a timeline of announcements relating to the forbearance
regime of 2008-2015:

THE ORIGINAL SIN: THE SEVEN-YEAR FORBEARANCE!
7.2 The forbearance policies had desired short-term economic effects. GDP growth recovered
from a low of 3.1% in FY2009 to 8.5% within two years, as shown in Figure 1. There was