The Reserve Bank of India’s announcement on February 6 to show forbearance towards stressed sectors, including micro, small and medium-sized enterprises (MSMEs) and real estate, signifies a gradual shift from the regulator’s earlier effort to enhance the quality and transparency of asset classification in the Indian banking system, said Fitch Ratings on Monday. The move is likely to defer asset quality pressures unless there is sustained improvement in macroeconomic conditions, the ratings agency said.
Allowing a one-time restructuring of loans to MSMEs and the announced relaxation in asset classification for certain real estate projects mark a further dilution of the RBI’s drive to enhance loan recognition. Such regulatory forbearance carries the risk of perpetuating moral hazard, as it follows aggressive lending growth and risk-taking in certain sectors in the five years to FY19, it said.
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