The Indian banking system has been grappling with monumental challenges in recent years, courtesy of the pandemic, a recessionary global economy and other lending and recovery woes. A good example of the current state of Indian banking can be the amount of bad loans/NPAs written off over the years and the recovery percentage achieved.
According to an RTI, and various media reports, state-run banks in India and private banks together wrote off ~Rs 10 lakh crores in bad loans in the last 5 years. The astounding thing is not the figure, but the recovery rate (for the same period), which has been an abysmal 13% (Rs. 1,32,036 crores) only.
The pertinent question is, why do banks write off loans in the first place? And what does the process entail? Furthermore, the dismal recovery rate begs the question: why is it so low?
Let’s find out.
What is a loan write-off?
When a borrower defaults on a loan, and there is a slim chance of recovery, the bank may resort to writing off the loan. In technical terms, written-off assets refer to loan assets that have turned sour due to non-repayment for at least 3 consecutive quarters, presenting a significant challenge in terms of recovery. The bank moves the NPA of the assets side and reports the amount as a loss. This essentially means that the bank can no longer count the loan as an asset on its books.
Writing off loans can help banks to decrease the level of non-performing assets (NPAs) in their portfolio. Many critics (of the process) term it the ‘whitewashing’ of balance sheets.
Why do banks resort to writing off loans?
Banks resort to writing off loans as a means to restructure or clean up their balance sheets.
Additionally, writing off loans can result in tax benefits as the written-off amount is typically deducted from profits, reducing the tax liability.
However, it’s essential to understand that writing off a loan does not absolve borrowers of their liabilities. It’s not the same as a loan waiver. After writing off a loan, banks continue their efforts to recover the debt using different means and make provisions accordingly.
All said the process of loan write-offs is tedious and lengthy, with a low probability of recovering the funds. This trade-off often proves counterproductive, as banks lose valuable time pursuing written-off loans with little to no chance of success.
How much NPA was written off by public and private sector banks?
In an attempt to reduce non-performing assets (NPAs) and clean up their balance sheets, private banks in India have written off loans worth Rs 2,74,772 crores over the past five years. This amount represents 27.28% of the total write-offs of ~Rs 10 lakh crores made by the banking sector during this period, as mentioned previously.
On the other hand, public sector banks accounted for the majority of write-offs, with a whopping Rs 7,34,738 crores written off, representing 72.78% of the total amount.
What is the Finance Ministry’s strategy for state-run banks?
According to the Finance Minister, Mrs. Nirmala Sitharaman, borrowers of written-off loans are still liable for repayment, and banks will continue their efforts to recover dues from them.
The Finance Ministry has also outlined a strategy for state-run banks in India and other banks to recover written-off loans by pursuing recovery actions through various mechanisms and acts such as –
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act)
The SARFAESI Act is a legislation in India that empowers banks and financial institutions to take control of and dispose of the assets and properties of borrowers who have defaulted on their loans without requiring judicial intervention.
- Debts Recovery Tribunals (DRT)
The year 1993 witnessed the enactment of the Recovery of Debts due to the Banks and Financial Institutions (RDDBFI) Act, which laid the foundation for the creation of specialised tribunals called Debt Recovery Tribunals (DRT). These tribunals were established to expedite the debt recovery process for banks and other financial institutions.
Banks can also resort to negotiated settlements, civil court lawsuits and the sale of non-performing assets (NPAs).
The current recovery rates for accounts written off are reported to be less than 15%. In the same light, the Finance Ministry has instructed state-run banks in India to manage their written-off loan accounts proactively and improve their recovery rates to approximately 40%.
State-run banks in India have only retrieved an amount of ~Rs. 1 lakh crore out of Rs. 7.34 lakh crore, which ultimately resulted in a net written-off amount of ~Rs. 6.31 lakh crore as of March 2022. The ministry has instructed that banks need not get complacent about the recovery and work on improving recovery rates.
Conclusion
Banks have been writing off enormous amounts of loans every year, with recovery rates being negligible. The finance ministry has proposed several solutions for banks to manage their NPAs, and recover better. It remains to be seen how much of these loans actually get recovered or turn bad.
