Write-offs a scam, small loans rarely in it, says former RBI Deputy Governor

Public sector banks have written off Rs 1,14,000 crore in the last three years, as reported in The Indian Express on February 8, based on a response by the Reserve Bank of India to an RTI application.

Written by George Mathew , Khushboo Narayan | Mumbai | Updated: February 11, 2016 8:36 am
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Former Reserve Bank Deputy Governor Dr K C Chakrabarty says technical write-offs by banks is a “scam” and should be stopped.

“Technical write-offs by Indian banks are inequitable and should be stopped. It is a big scam. Small loans are rarely written off, most of them are big loans,” London-based Chakrabarty, who handled the supervision department of the RBI from 2009 to 2014, told The Indian Express.

Public sector banks have written off Rs 1,14,000 crore in the last three years, as reported in The Indian Express on February 8, based on a response by the Reserve Bank of India to an RTI application.

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Banks are planning to write off more bad loans in the current year, and this could be Rs 52,227 crore, similar to the quantum written off in 2014-15.

There’s a reason for the eagerness on the part of banks to write off loans though a loan is technically the bank’s asset. “It benefits banks in terms of tax liability,” M Narendra, former chairman and MD of Indian Overseas Bank, said. The other benefit is that the bad loan no longer stays in the bank’s books.

The write-off instruction comes from the head office.

“Technical or prudential write-off is the amount of non-performing loans which are outstanding in the books of the branches, but have been written off (fully or partially) at the head office level. Amount of technical write-off should be certified by statutory auditors,” says the RBI’s master circular on income recognition and asset classification.

“Banks should either make full provision as per the guidelines or write­ off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/tax consultants. Recoveries made in such accounts should be offered for tax purposes as per rules,” the RBI says.

Narendra said, “Write-off happens when a loan becomes non-recoverable or dead asset. It’s done after making 100 per cent provisioning. The bank continues its recovery measures even after the write-off.”

Non-performing assets (NPAs) reflect poorly on the bank and they are eager to write it off or remove it from the balance sheet and reduce the tax liability.

According to a former government official, some banks write off accounts to sell them to asset reconstruction companies (ARCs) at lower prices and make easy money out of it. Banks don’t want to take on the tedious recovery process. Selling the assets to ARCs is a quick-fix solution for banks. “In some cases, bank officials cut sweet deals with the promoter of defaulting companies to write off loans,” the official said.

“There’s lack of vision to manage the NPA accounts among bank managements. There’s also lack of direction on the part of the Reserve Bank. What’s happening in PSU banks doesn’t get noticed. The attitude of borrowers is also changing on the issue of repayment. Many of them inflate the cost of the project. Valuers empanelled with the banks also go by that valuation,” Ramnath Pradeep, former chairman and MD of Corporation Bank, said. “I have seen some of the banks in a consortium writing off loans while others don’t do it. There’s no uniformity in their approach.”

If it is the head office of a bank that approves write-offs, loans are sanctioned by a credit approval committee comprising the chairman, executive directors and the general managers of a bank. This mechanism was put in place through a 2012 directive by the Finance Ministry. These committees can approve credit proposals up to Rs 400 crore in the case of Category A banks and Rs 250 crore in the case of other PSU banks. If the loan proposal is above this limit, it has to be vetted by the board committee. Often, the board clears the proposal put across by the management without much discussion. Small PSU banks blindly follow the decisions of bigger banks without going for any due diligence on their own, a government source said.

Boards of public sector banks have senior officials from the government as well as the RBI on their boards. “The irony of NPAs of PSU banks is that they have happened right under the nose of RBI officers who are on the boards of PSU banks. Thus, in a way the RBI becomes directly responsible for the banks’ decisions on credits that became NPAs,” K K Srinivasan, former Member (Life) of the Insurance Regulatory Development Authority of India, said.

For instance, Financial Services Secretary Anjuly Chib Duggal and Reserve Bank Deputy Governor Dr Urjit R Patel are on the SBI board. Rajesh Aggarwal, Joint Secretary in the Department of Financial Services, is a Director on the board of Punjab National Bank. B P Kanungo, who was Regional Director of the RBI in Kolkata, is also on the board of PNB.

In Bank of India, Anna Roy, Joint Secretary in the Department of Financial Services, is the government nominee while S S Barik, Regional Director of RBI, North Eastern States, is the RBI nominee on the board. Alok Pande, Director in the Department of Financial Services, and Nirmal Chand, Regional Director of RBI, Thiruvananthapuram, are on the board of Indian Overseas Bank.

“A regulator should not be a part of the apex business decision-making body (board of directors) of regulated entities. This position needs to be rectified if the RBI is to be absolved of the responsibility of NPAs of PSU banks,” Srinivasan said. This will require the RBI to withdraw its nominees from 27 PSU bank boards.