Asset Quality Review
Also called: AQR · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
An Asset Quality Review (AQR) is a check by the regulator. It tests whether banks are correctly classifying their bad loans and setting aside enough money for them. RBI carried out an AQR in 2015-16, under Governor Rajan. Banks had been hiding stress through evergreening (giving fresh loans so old dues could be repaid) and through restructuring. The AQR forced them to recognise hidden NPAs. Reported bad loans jumped, and scheduled commercial bank GNPA peaked at about 11.2% in March 2018. It was the "Recognition" step of the 4R strategy: Recognition, Resolution, Recapitalisation, Reform.
Example
During the AQR, RBI inspectors found that several large steel and power loans were still shown as standard even though repayments had stalled. The banks were told to reclassify them as NPAs and raise provisions, and their reported profits fell sharply.
Don't confuse with
- Stress test: simulates how banks would cope in future bad scenarios, such as a deep recession. An AQR checks whether today's reported loan quality is true.
Related concepts
- Twin balance sheet problem
- Evergreening
- Loan restructuring
- Bank recapitalisation
- Loan write-off
- One-time settlement
- Wilful defaulter