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Banks write off bad loans worth Rs 2.09 lakh crore in 2022-23: RBI

Banks wrote off bad loans worth over Rs 2.09 lakh crore (around US $ 25.50 billion) during the year ended March 2023, taking the total loan write-off by the banking sector to Rs 10.57 lakh crore (around $ 129 billion) in the last five years, the Reserve Bank of India (RBI) said in a Right to Information (RTI) reply.

This huge loan write-off aided banks to bring down gross non-performing assets (GNPA) – or loans defaulted by borrowers — to a 10-year low of 3.9 per cent of advances in March 2023. Gross NPAs of banks had fallen from Rs 10.21 lakh crore in FY2018 to Rs 5.55 lakh crore by March 2023, mainly on the back of loan write-offs by banks.

Banks have written off a whopping Rs 15,31,453 crore (US $ 187 billion) since FY2012-13, as per RBI data.

However, what’s to be noted is that loans written off by banks will remain in the books of banks as unrecovered loans. The central bank RTI reply says banks recovered only Rs 109,186 crore from Rs 586,891 crore loans written off in the last three years, revealing that they could only recover 18.60 per cent of the write-offs during the three-year period.

The total defaulted loans (including write-offs but excluding loans recovered from write-offs in three years) amount to Rs 10.32 lakh crore, according to back of the envelope calculation. Including write-offs, the total NPA ratio would have become 7.47 per cent of advances as against 3.9 per cent reported by the banks.

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The RBI’s RTI reply to The Indian Express says that loan write-offs by banks rose to Rs 209,144 crore during the fiscal ended March 2023 as against Rs 174,966 crore a year ago in March 2022 and Rs 202,781 crore in March 2021. Banks have been writing off defaulted loans to reduce the NPAs in their books. However, banks have reported abysmal recoveries from the written off loans – they could recover only Rs 30,104 crore in FY21, Rs 33,534 crore in FY22 and Rs 45,548 crore in FY23.

When a loan is written off by a bank, it goes out from the asset book of the bank. The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very low chance of recovery. The lender then moves the defaulted loan, or NPA, out of the assets side and reports the amount as loss. “After write-off, banks are supposed to continue their efforts to recover the loan using various options. They have to make provisioning also. The tax liability will also come down as the written off amount is reduced from the profit,” said a banking analyst.

A loan becomes an NPA when the principal or interest payment remains overdue for 90 days.

While many big and small defaulted loans were written off by banks over the years, the identity of these borrowers was never revealed by banks or the RBI. Among individual banks, reduction in NPAs due to write-offs in the case of State Bank of India was Rs 24,061 crore in FY2023, Punjab National Bank Rs 16,578 crore, Union Bank Rs 19,175 crore, Central Bank of India Rs 10,258 crore and Bank of Baroda Rs 17,998 crore.

The writing off NPAs is a regular exercise carried by banks to clean up the balance sheet. “A substantial portion of this write-off is, however, technical in nature. It is primarily intended at cleansing the balance sheet and achieving taxation efficiency. In ‘Technically Written Off’ ‘ accounts, loans are written off from the books at the Head Office, without foregoing the right to recovery. Further, write-offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks,” the RBI had earlier said in an explanatory note.

Not surprisingly, according to the RBI, public sector banks reported the lion’s share of write-offs at Rs 366,380 crore accounting for nearly 62.45 per cent of the exercise in the last three years.

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The RBI guidance on write-offs says that in a deregulated credit environment, banks have been advised to take credit related decisions including waiving off bad loans as per their commercial assessment of the viability of the loans in terms of their board approved policies subject to prudential norms issued by the RBI. The policy on loan recoveries is required to lay down the manner of recovery of dues, targeted level of reduction (period-wise), norms for permitted sacrifice or waiver, factors to be taken into account before considering waivers, decision levels, reporting to higher authorities and monitoring of write-off and waiver cases.

However, the recovery process can take years as most of the loans involved in write-offs belong to wilful defaulters and shady promoters who generally don’t pay back to the banks. “It’s non-transparent and it’s without any policy. There’s possibility of wrong-doing. Generally, write-off is supposed to be small, used sparingly when there’s some crisis. Technical write-off creates non-transparency, destroys the credit risk management system and brings all types of wrong-doings into the system. You must declare how much you’re writing off. You’re writing off public money. It’s a scandal. You’re writing off public money you’re not acknowledging,” said a former RBI official.

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According to the RBI’s Financial Stability Report (FSR) for June 2023, if the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise to 4.1 per cent and 5.1 per cent, respectively.

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