Asset Quality Review
The Asset Quality Review (AQR) was a RBI-initiated special examination of Indian bank loan portfolios conducted in 2015-16 under Governor Raghuram Rajan, which uncovered large-scale divergence between banks' reported NPAs and the actual stress in their books, leading to a sharp increase in recognised bad loans.
By 2015, India's banking system was carrying a large stock of stressed assets that were not being fully recognised as Non-Performing Assets. Banks had used various restructuring tools — particularly the Corporate Debt Restructuring (CDR) mechanism, Strategic Debt Restructuring (SDR), and scheme for sustainable structuring of stressed assets (S4A) — to defer NPA recognition. This practice, sometimes called 'evergreening', meant that loan accounts that were effectively non-viable were being kept technically standard through fresh disbursements or restructuring.
The AQR, announced in late 2015 as part of RBI's push for a 'clean and credit-worthy' banking system, required banks to classify specific accounts uniformly as per RBI's IRAC (Income Recognition and Asset Classification) norms, removing the discretion banks had been exercising. RBI examiners compared bank classifications against actual repayment behaviour and borrower viability, flagging discrepancies.
The results were dramatic. Gross NPA ratios for the banking system rose from approximately 4.3% in September 2015 to over 11% by March 2018. For individual PSBs, the divergence in reported versus RBI-assessed NPA was often hundreds of crores or thousands of crores. Punjab National Bank, Central Bank, and IDBI Bank saw their NPA ratios rise to over 20%. This triggered the Prompt Corrective Action (PCA) framework, which restricted lending, branch expansion, and dividend payment for several banks.
Raghuram Rajan, who served as RBI Governor from September 2013 to September 2016, was the architect of the AQR. He frequently argued that recognising problems on time — even if painful — was preferable to allowing them to fester and become systemic. The AQR effectively ended years of regulatory forbearance.
The AQR had cascading consequences — it exposed the extent of the twin balance sheet problem (stressed bank books coinciding with over-leveraged corporate balance sheets), catalysed the IBC insolvency framework, and drove the massive PSB recapitalisation programme of 2017-19. For bank equity investors, the AQR period (2016-18) was marked by sharp stock price corrections in PSBs and elevated provisioning drag on earnings. In retrospect, it was a necessary cleansing that set the stage for the credit cycle recovery of the early 2020s.