Banks have written off Rs 2,02,781 crore of bad loans in the fiscal ended March 2021 when the Covid-19 pandemic hit the country and the Reserve Bank of India (RBI) allowed banks to announce reliefs like loan moratorium for borrowers.
With this, banks have written off a whopping Rs 11,68,095 crore worth of bad loans, or non-performing assets (NPAs), in the last ten years with most of the write-offs coming in the last seven years, the RBI said in an RTI reply to The Indian Express. This is almost 10.54 per cent of total non-food bank advances of Rs 110.79 lakh crore and very close to the government’s gross market borrowing of Rs 12.05 lakh crore projected for FY 2021-22 in the Union Budget.
Of the total write-off in 10 years, as much as Rs 10.72 lakh crore write-off has happened since financial year 2014-15 when the Narendra Modi government assumed power. This write-off aided banks to whitewash their bad loan portfolio.
Normally, banks write off an NPA when all recovery measures are exhausted and chances of recovery of loan are remote. However, banks are supposed to continue recovery steps even after a write-off. While a loan can be written off if it is in default for more than three consecutive quarters, banks have not disclosed the names of borrowers whose loans were written off so far.
Banks wrote off Rs 2,34,170 crore in FY2019-20, Rs 2,36,265 crore in FY2018-19, Rs 1,61,328 crore in 2017-18 and Rs 1,08,373 crore in 2016-17, the RBI said.
Five banks, led by State Bank of India (SBI), wrote off Rs 89,686 crore in the fiscal ended March 2021, with SBI accounting for Rs 34,402 crore, the RBI said. Union Bank wrote off Rs 16,983 crore, PNB Rs 15,877 crore and Bank of Baroda Rs 14,782 crore in FY21.
Almost 75 per cent of the write-offs are done by public sector banks (PSBs), helping them to make their loan book and balance sheets decent. “Once a loan is written off, it’s taken off the NPA book. It helps the bank to lower the NPAs and get tax benefit. Actually, the defaulted loan still exists as it’s a book entry,” said an official of a nationalised bank.
Banks often write off an NPA when all recovery efforts are exhausted and chances of recovery are very low. However, recovery steps are to be undertaken despite a write-off. Almost 75% of write-offs are done by PSBs.
According to the RBI’s master circular on Prudential Income recognition, banks are custodians of public deposits and are therefore expected to make all efforts to protect the value of their assets. Banks are required to extinguish all available means of recovery before writing off any account fully or partly, the RBI said.
“It is observed that some banks are resorting to technical write-off of accounts, which reduces incentives to recover,” it said. Banks resorting to partial and technical write-offs should not show the remaining part of the loan as standard asset. With a view to bring in more transparency, henceforth banks should disclose full details of write-offs, including separate details about technical write-offs, in their annual financial statements, it said.
Banks will initially make provisions on such assets and then a write-off is done when the loan becomes irrecoverable. The loan is then excluded from the balance sheet and taxable income of banks gets reduced.
However, experts say there is no transparency in the process and loans of big defaulters are normally written off while small-time borrowers don’t get any mercy from the banks. The recovery from the written-off loans are not more than 15-20 per cent, said a banking source. “Generally, write-off should be small, and should be used sparingly when there’s some crisis. Technical write-off creates non-transparency, destroys the credit risk management system and brings all types of wrongdoings into the system,” said a former RBI official.
“I have nothing against a write-off but it has to be done scarcely and within a policy, with all efforts taken to recover the money. Any asset which is backed up by tangible asset is never written off. Secondly, you must be subject to scrutiny for these write-offs. There must be a policy. You ask any banker. They have written off Vijay Mallya’s loan. Then how are they going to recover that money? Use it very sparingly and do it where it’s essential. If there’s asset, why are you writing it off?” the official further said.
A substantial portion of this write-off is, however, technical in nature. It is primarily intended at cleansing the balance sheet and achieving taxation efficiency.
“In ‘Technically Written Off’ accounts, loans are written off from the books at the Head Office, without foregoing the right to recovery. Further, write-offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks,” the central bank said in an explanatory note.