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Regulatory Forbearance: An Emergency Medicine, Not Staple Diet! 235

(f) While the learnings from the previous episode must be employed to avoid a recurrence,
ex-post analysis of complex phenomena must be disciplined by the insights highlighted
in Chapter 7 of the Survey. Specifically, to enable policymaking that involves exercise of
judgement amidst uncertainty, ex-post inquests must recognise the role of hindsight bias
and not make the mistake of equating unfavourable outcomes to either bad judgement,
or worse, malafide intent.
(g) Finally, the legal infrastructure for the recovery of loans needs to be strengthened de
facto. The Insolvency and Bankruptcy Code (IBC) has provided the de jure powers to
creditors to impose penalties on defaulters. However, the judicial infrastructure for the
implementation of IBC – comprised of Debt recovery tribunals, National Company Law
Tribunals, and the appellate tribunals must be strengthened substantially.

CHAPTER AT A GLANCE

 During the Global Financial Crisis, forbearance helped borrowers’ tide over temporary
hardship caused due to the crisis and helped prevent a large contagion.
 However, the forbearance continued long after the economic recovery, resulting in unintended
and detrimental consequences for banks, firms, and the economy.
 Given relaxed provisioning requirements, banks exploited the forbearance window to
restructure loans even for unviable entities, thereby windowdressing their books.
 As a result of the distorted incentives, banks misallocated credit, thereby damaging the quality
of investment in the economy.
 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
 To enable policymaking that involves an exercise of judgement amidst uncertainty, ex-post
inquests must recognise the role of hindsight bias and not make the mistake of equating
unfavorable outcomes to either bad judgement, or worse, malafide intent.
 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conducted immediately after the forbearance is withdrawn.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 legal infrastructure for the recovery of loans needs to be strengthened de facto.

REFERENCES:
Admati, A., & Hellwig, M. (2014). The Bankers’ New Clothes: What’s Wrong with Banking
and What to Do about It-Updated Edition. Princeton University Press.Chari, A., L. Jain, and N.
Kulkarni (2019): “The Unintended Consequences ofRegulatory Forbearance,” Working Paper.

Chopra, Y., Nishesh, N., and Tantri, P. 2020. “Does Regulatory Forbearance On Bank Loans
Adversely Impact Governance of Borrowing Firms?: The Indian Experience.”, Working Paper
Chopra, Y., Subramanian, K., and Tantri, P. 2020. “Bank Cleanups, Capitalization, and Lending:
Evidence from India.” The Review of Financial Studies.
Diamond, D.W. and Dybvig, P.H., 1983 “Bank Runs, Deposit Insurance, and Liquidity”, Jour-
nal of Political Economy, Volume 91 Number 3