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'In the short-term, the markets may be affected' by the review but 'it will help address what they are worried about which is why we need transparency,' says former chief economic advisor.
Non-banking financial companies, a segment facing liquidity challenge, need asset quality review to know their stress levels and solutions must be found for them, said former chief economic advisor Arvind Subramanian.
Subramanian, now a professor at Harvard University, said the asset quality review for banks (in 2015-16) had an important positive effect as it brought to light several issues and banks couldn't hide the problem.
If you hide the problem, you also can't galvanise the political will to address the problem. he said.
An asset quality review for NBFCs, including housing finance companies, is necessary given the uncertainty over NPAs.
"There may be a push back to asset quality review.
"The IL&FS group default was representative of what lies beneath.
"Think of the quality of the oversight that we did not know about the monster," he said in a panel discussion on the launch of his book Of Counsel -- the challenges of Modi-Jaitley economy.
The panel discussion was organised by Asia Society.
He said, "I would like the system, the government and the Reserve Bank of India (RBI) to do an asset quality review for the NBFCs.
"I think the review for banks had an important positive effect as it brought to light some issues.
"If you hide the problem, you also can't galvanise the political will to address the problem. You can do an asset quality review for the NBFC because it is necessary given the uncertainty over non-performing assets and over NBFCs," he added.
"I had come out with 4Rs -- recognition, resolution, recapitalisation and reforms -- for the banking system and had come up with a Subramanian law of non-recognition.
"That law states that at every point in time, the bad assets are 20-30 per cent higher than what you think they are.
"This (review of NBFCs) will require cooperation by all the regulators, the government, National Housing Bank and the RBI."
When asked about the scale of such an exercise given that there are over 2,000 NBFCs and HFCs with assets under management of over Rs 2-3 billion, Subramanian said, "I think they will have to restrict it to a manageable size.
"In the short-term, the markets may be affected but it will help address what they are worried about which is why we need transparency."
