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Loan Write-offs

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December 06, 2022

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.

loan-writeoff

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.

Quick Facts

Non-performing assets (NPAs)

  • NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
  • Substandard assets - Assets which has remained NPA for a period less than or equal to 12 months.
  • Doubtful assets - An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  • Loss assets - Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.

 

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?
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