New Delhi, Jan 29 (IANS): Highlighting the problem of asymmetric information between the regulator and the banks, which gets accentuated during the forbearance regime, the Economic Survey said that an asset quality review exercise must be conducted immediately after the forbearance is withdrawn.

According to the survey, the legal infrastructure for the recovery of loans needs to be strengthened de facto.

Regulatory forbearance for banks involved relaxing the norms for restructuring assets, where the restructured assets were no longer required to be classified as Non-Performing Assets (NPAs) and therefore did not require the levels of provisioning that NPAs attract.

The survey noted that to address the economic challenges posed by the COVID-19 pandemic, financial regulators across the world have adopted regulatory forbearance and India is no exception.

It said that the emergency measures such as forbearance prevent spillover of the failures in the financial sector to the real sector, thereby avoiding a deepening of the crisis.

Therefore, as emergency medicine, forbearance occupies a legitimate place in a policy maker's toolkit. The survey, however, points out that forbearance represents an emergency medicine that should be discontinued at the first opportunity when the economy exhibits recovery.

"It is not a staple diet that gets continued for years," said the Economic Survey 2020-21.

The survey further observes that 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, it added.