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
RBI, reserve bank of india, RBI governor, RBI deputy governor, KC Chakrabarty, raghuram rajan, scam, indian express Reserve Bank of India

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.

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  1. A
    Aanand_Sharma
    Feb 11, 2016 at 5:13 am
    That money could have easily reached RSS terrorists. Country is in for a unavoidable disintegration.
    Reply
    1. H
      Haradhan Mandal
      Feb 11, 2016 at 3:18 am
      The FIRST step should be /should have been to publish in public domain (website) details of loans above certain limit (10 Crore) -AS SOON AS the loan is approved. The details should include borrower, the project, the collateral/guarantee and the Bank officials - who vetted and who approved the loan. Some talks here are so naive and unprofessional such as "Narendra said, “Write-off happens when a loan becomes non-recoverable or dead et. It’s done after making 100 per cent provisioning. The bank continues its recovery measures even after the write-off.” 'becomes non-recoverable' but bank continues its recovery measures ''- for whose pleasure? 100 per cent provisioning'' - where does the 'provisioning' comes from??
      Reply
    2. T
      TIHAEwale
      Feb 11, 2016 at 3:03 am
      if the sanctiong authorities are made Govt guests like the Subroto Roy of Sahara then only these sort of loot in PSBs will not happen but don't expect from Feku56 and Arun as they are obliged to big industrialists.
      Reply
      1. T
        TIHAEwale
        Feb 11, 2016 at 2:59 am
        it is undeserving people like M Narendra, former chairman and MD of Indian Overseas Bank - who are in a way responsible for collapse of IOB. This Narendra in order to repay the godfathers who ensured his elevation as CMD of IOB knowingly sanctioned in gold plated loans in this he showed carrots to Executives in the level of AGM and above of IOB to fall in line.
        Reply
        1. A
          Abhijit Bhattacharya
          Feb 11, 2016 at 9:19 am
          Big corporates will take big loans, finance political parties and their elections and later get the write off. Very convenient
          Reply
        2. G
          godknowswho
          Feb 11, 2016 at 4:13 am
          What was this Chakrabarty doing while he was in charge of bank supervision for such a long time? pot calling the kettle black?Why media never questions these things and take things for granted?
          Reply
          1. A
            ak dev
            Feb 11, 2016 at 6:01 am
            I agree with K C Chakrabarty. Write-offs by banks is a “scam”. But Jaitley will not allow a CBI inquiry into this high level corruption scandal. He is not even allowing names of defaulters to be disclosed. I am totally disappointed with Jaitley's way of working as finance minister. For him political compulsions are more crucial than public interests. Will he ever learn to win election.
            Reply
          2. M
            M Alam
            Feb 14, 2016 at 8:16 am
            Bose dk..banks writing off 52000 crore this year alone..and they r getting this direction from the govt. So stop being bhakt now
            Reply
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