NPA write offs: The government and the RBI are pushing major reforms and strengthening the regulatory processes to reduce NPAs in the banking system. This has prompted banks to write off bad loans worth around Rs 2.09 lakh crore ($25.50 billion) during the year ended March 2023. This has taken the total loan write offs by the banking sector to Rs 10.57 lakh crore in the last five years.
Owing to the loan write off, banks have been able to bring down gross non-performing assets or loans defaulted by borrowers to a 10-year low of 3.9% of advances in March 2023. In fact, banks have been on a spree to write off loans which has led to a dramatic fall in gross NPAs from Rs 10.21 lakh crore in FY2018 to Rs 5.55 lakh crore by March 2023. Cumulatively, in nearly a decade, banks have written off a whopping Rs 15,31,453 crore.
However, the question is how do banks benefit from loan write offs instead of recovering them? When a bank writes off a loan, it goes out from the asset book of the bank. This is done after the borrower has defaulted on the loan repayment and there is a very low chance of recovery. This said amount is reported as a loss by the lender and is moved out of the assets side.
However, banks are required to continue their efforts towards recovering the loan using various options even after they are written off. Banks benefit by writing off loans as their tax liabilities also come down since the said asset is no longer an asset but is a liability. A loan becomes an NPA when the principal or interest payment remains overdue for 90 days. Banks engage in writing off bad loans to demonstrate lower NPAs, which are an important indicator of a bank’s financial health.
Public sector banks reported the maximum share of write offs at Rs 366,380 crore accounting for nearly 62.45% of the exercise in the last three years.
Bad loans and wilful defaulters
As stated before, RBI has been looking to help banks come clean with their bad loans and had earlier mandated banks to compromise with wilful defaulters. RBI’s rationale was that the same ensures maximum recovery from distressed assets. While banks want a speedy recovery of their loans, the recovery process can take years as most of the loans involved in write offs belong to wilful defaulters and shady promoters who generally do not pay back to the banks.
Wilful defaulters are those who can pay off loans but willingly choose to not do so. It is found that the borrower does not utilise the finance from the lender for the specific purpose for which finance was availed, but instead diverts the funds for other purposes, or syphoned off funds, or disposed of or removed the movable fixed assets or immovable property. RBI’s move to compromise with wilful defaulters was criticised by several bankers and banks association stating that the same may spur even more cases of wilful defaults.
The banks have not revealed the identity of the borrowers whose loans had been written off. Many big and small defaulted loans were written off by banks over the years. Among individual banks, State Bank of India topped write offs at Rs 24,061 crore in FY2023 followed by Punjab National Bank at Rs 16,578 crore, Union Bank at Rs 19,175 crore, Central Bank of India at Rs 10,258 crore and Bank of Baroda at Rs 17,998 crore.
NPA write offs is not a concrete solution
Neither writing off bad loans nor compromise settlements with wilful defaulters provides a definitive solution towards resolving the NPA problem and bankers believe that the practices are causing significant harm to the banking industry. The same was reiterated by a former banking official as well who said that the non-transparent policy about writing off bad loans is harming the banking system. The person also said that write off must be small and used sparingly when there is some crisis. Instead, banks have been writing off massive amounts of loans thereby putting the credit risk management system to risk and attracting all types of wrong-doings into the system.
In fact, since it is public money that is being written off, the banks and the RBI must declare how much they are writing off and who owes the money.