NPAs, Write-Offs and Recoveries

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July 17, 2023

Why in news?

Recently, Gross Non-Performing Assets(NPAs) have fallen, but emergence of fresh NPAs and unsatisfactory recoveries needs banks intervention.

What are NPAs?

  • NPA - An asset becomes non-performing when it ceases to generate income for the bank.
  • It is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • Types - Banks are required to classify NPAs into Substandard, Doubtful and Loss assets.
    1. Substandard assets - Assets which has remained NPA for a period less than or equal to 12 months.
    2. Doubtful assets - An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
    3. 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.

What is the trend in NPAs?

  • There is a decline in gross non-performing assets (GNPA) ratio of Indian banks.
  • In 2017-18, this ratio was as high as 11.2 % raising concerns on the stability of the banking system.
  • In 2022-23 GNPA ratio declined to 3.9%, there has been significant write-offs since 2016-17 amounting to 10 lakh crore.
  • During last three years (2019-22) alone fresh NPAs add up to ₹10.61 lakh crore

NPA trend 2023

What is loan write-off?

  • A loan write-off is a tool used by banks to clean up their balance-sheets. It is applied in the cases of bad loans or non-performing assets (NPA).
  • If a loan turns bad on the account of the repayment defaults for at least three consecutive quarters, the loan can be written off.
  • By writing-off a loan, the banks set free the money parked for the provisioning and utilise the amount for business (it will no longer be counted as an asset).
  • Lost inventory, unpaid debt obligation, bad debts, and unpaid receivables are also written off.
  • In the cases of NPA, 100 % provisioning is required in accordance with the Basel-III norms.
  • Some recent data show that private banks have been more active in writing off NPAs than public sector banks (PSBs).

To know more loan write-off click here.

What is the significance of loan write-off?

  • Tax benefits- Lenders become eligible for a tax rebate on the total loan value by writing them off.
  • Loan provisioning- By writing-off loans, lenders don’t need to release the remaining limit to defaulting borrowers.
  • Doing this helps them release funds previously blocked for a borrower.
  • They can use these to provide loans to others in need or for their business.
  • Right to recover- Lenders don’t lose the right to recover outstanding loans even after writing them off.
  • They can use the means necessary to recover the full or partial loan amount.
  • Governance-Writing-off loans help lenders maintain a clean and updated balance sheet, it results in significant decline in NPAs.

How to prevent NPA accumulation?

  • Revisit business models- Banks needs to revisit business models as fault-lines would lead to higher NPAs and credit losses.
  • Ideally, from lending perspective, banks need as many business models as credit segments and customer segments.
  • Governance - The layers of governance such as business, risk and operational governance must be regulated along with corporate governance.
  • Fine tune risk appetite- It is the amount of risk the lender is willing to undertake.
  • It needs to be aligned with risk culture, underwriting skills in a particular domain and risk tolerance.
  • Check fund diversion- The diversion of funds in corporate lending is more widespread and intense.
  • Bank collaboration is needed to detect the practice and find a remedial solution for the same.
  • Increase NPA recoveries- NPA recoveries is low around 25 % of the claim amount.
  • Even under the Insolvency Bankruptcy Code 2016, regime the recovery rate has fallen from 45 % to 23.8 %.
  • The government, regulators and lenders need to rework these recovery/resolution frameworks.
  • Need of skilled expertise- Underwriting skills and turnaround skills require high expertise because the changes in industry and real economy are quite fast and global.


  1. Business Line| NPA, Write-off, Recoveries
  2. India today| Loan write-off
  3. Investopedia| What is write-off
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