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In last 5 years, Rs 10 lakh crore in write-offs help banks halve NPAs

Banks recovered only Rs 1.32 lakh cr from write-offs in 5 years ending March 2022

A loan becomes an NPA when the principal or interest payment remains overdue for 90 days. (Representational/File)

AFTER WRITING off a huge amount of loans worth over Rs 10 lakh crore in the last five years, banks have been able to recover only 13 per cent of it so far.

The mega write-off exercise has enabled banks to reduce their non-performing assets (NPAs), or defaulted loans, by Rs 10,09,510 crore ($123.86 billion) in the last five years, according to data furnished by the Reserve Bank of India (RBI) in its reply to the Right to Information (RTI) request filed by The Indian Express.

Aided by this huge write-off, which would have been enough to wipe out 61 per cent of India’s estimated gross fiscal deficit of Rs 16.61 lakh crore for 2022-23, the banking sector reported a decline in gross NPAs to Rs 7,29,388 crore, or 5.9 per cent of the total advances, as of March 2022. Gross NPAs were 11.2 per cent in 2017-18.

Significantly, banks were able to recover only Rs 1,32,036 crore from the written off loans in the last five years, according to the RTI reply.

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Once a loan is written off by a bank, it goes out from the asset book of the bank. The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very low chance of recovery. The lender then moves the defaulted loan, or NPA, out of the assets side and reports the amount as loss.

Explained

Why do banks write off loans

AFTER A loan turns bad, a bank writes it off when chances of recovery are remote. It helps the bank reduce not only its NPAs but also taxes since the written off amount is allowed to be deducted from the profit before tax.

“After write-off, banks are supposed to continue their efforts to recover the loan using various options. They have to make provisioning also. The tax liability will also come down as the written off amount is reduced from the profit,” said Sanjay Agarwal, banking analyst with Care Ratings.

A loan becomes an NPA when the principal or interest payment remains overdue for 90 days.

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The reduction in NPAs due to write-offs was Rs 13,22,309 crore in the last ten years, the RBI said. “Data is as reported by the banks,” the RBI said in its RTI reply.

The total defaulted loans (including write-offs but excluding loans recovered from write-offs in five years) amount to Rs 16.06 lakh crore, according to back of the envelope calculation. Including write-offs, the total NPA ratio would have become 13.10 per cent of advances as against 5.9 per cent reported by the banks.

Not surprisingly, according to the RBI, public sector banks reported the lion’s share of write-offs at Rs 734,738 crore accounting for nearly 73 per cent of the exercise.

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When asked about the RBI guidance on write-offs, the RBI replied, “It may be noted that in a deregulated credit environment, banks have been advised to take credit related decisions including waiving off bad loans as per their commercial assessment of the viability of the loans in terms of their board approved policies subject to prudential norms issued by the RBI.”

The policy on loan recoveries is required to lay down the manner of recovery of dues, targeted level of reduction (period-wise), norms for permitted sacrifice/ waiver, factors to be taken into account before considering waivers, decision levels, reporting to higher authorities and monitoring of write-off and waiver cases, the RBI said in the RTI reply.

“The recovery process can take years. It’s spread over many years,” Agarwal said.

However, the RBI did not provide the names of top loan write-offs. “Information on borrower-wise loan write-off is not collected by us and hence, not available with us,” the RBI replied.

While many big and small defaulted loans were written off by banks over the years, the identity of these borrowers was never revealed by banks. Among individual banks, reduction in NPAs due to write-offs in the case of State Bank of India was Rs 2,04,486 crore in the last five years, Punjab National Bank Rs 67,214 crore and Bank of Baroda Rs 66,711 crore. Among private banks, ICICI Bank’s reduction in NPAs due to write-offs was Rs 50,514 crore.

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The writing off NPAs is a regular exercise carried by banks to clean up the balance sheet. “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 RBI had earlier said in an explanatory note.

First published on: 21-11-2022 at 04:25:53 am
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