Loan Write-offs

Why in news?

As per the government, during the last five years (2017-18 to 2021-22), scheduled commercial banks wrote off non-performing assets (NPAs) worth Rs 9,91,640 lakh crore.

What is the RBI data on loan write-offs?

• According to RBI data, banks have written off Rs 10,09,510 crore over the last five years.
• Public Sector Banks (PSBs) accounted for most of these write-offs.
• Banks were able to recover only 13 % of this amount subsequently despite lending funds against assets or collaterals.

What are the causes for losses in banking / financial sector (BFSI)?

• Major causes for losses in banking / financial sector (BFSI) include
  • Economic downturn
  • Technological disruption
  • Change in government policies
  • Regulatory hurdles
  • Increased competition
  • Fraud or malfeasance
  • Banker’s error of judgement in advancing funds

What does loan write-offs mean?

• Loan write-offs - Writing off a loan essentially means it will no longer be counted as an asset.
• Significance - By writing off loans, a bank can reduce the level of non-performing assets (NPAs) on its books.
• The amount so written off reduces the bank’s tax liability.
• Reason - The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very low chance of recovery.
• It may be important to realise that all loan write-offs are not lost money.
• Many write-off cases continue to be on birth register of banks/financial institutions.
• Write-off is resorted to even in cases where the bank has not exhausted all avenues for recovery of dues.
• Such write-offs do not affect the right of the bank to proceed against the borrowers to collect the dues.
• Any recovery made against the borrower is considered as a profit for the bank in that financial year.

Why loan classification is so significant?

• Loan classification reflects what the true value of the loan might be.
•  It is accompanied by provisioning, which ensures the bank sets aside a buffer to absorb likely losses.
• If the losses do not materialize, the bank can write back provisioning to profits.
• If the losses do materialize, the bank does not have to suddenly declare a big loss, it can set the losses against the prudential provisions it has made.
• The bank balance sheet then represents a true and fair picture of the bank’s health.

References

1. The Hindu Businessline│ Loan write-offs are above board
2. Indian Express│ What is a loan write-off and why do banks do it?