The Reserve Bank of India (RBI) made public that during the financial year ending in March 2023, banks cancelled bad loans totalling more than Rs 2.09 lakh crore (approximately US $25.50 billion). This contributed to a total loan write-off of Rs 10.57 lakh crore (around $129 billion) within the banking sector over the past five years.
The significant loan write-off helped banks bring down their gross non-performing assets (GNPA) to the lowest level in 10 years, reaching 3.9 per cent of advances by March 2023.
This decline in GNPA was primarily due to the loan write-offs, as gross NPAs decreased from Rs 10.21 lakh crore in FY2018 to Rs 5.55 lakh crore by March 2023.
RBI Data Reveals Banks’ Substantial Loan Write-Offs and Low Recovery Rates
RBI data reveals that banks have written off a significant amount of Rs 15.31 lakh crore (approximately US $187 billion) since FY2012-13. However, it’s important to note that these written-off loans still remain as unrecovered loans on the banks’ books. The data from an RBI’s Right to Information (RTI) response showed that banks were only able to recover Rs 109,186 crore out of the Rs 586,891 crore of loans written off in the last three years, resulting in a recovery rate of just 18.60 per cent during that period.
Considering the loans that were written off, the total defaulted loans amounted to Rs 10.32 lakh crore. Taking into account the write-offs, the non-performing assets (NPA) ratio would have been 7.47 per cent of advances instead of the reported 3.9 per cent by the banks.
According to the RBI’s RTI response, the loan write-offs by banks had risen to Rs 209,144 crore during the financial year ending in March 2023, up from Rs 174,966 crore in March 2022 and Rs 202,781 crore in March 2021.
Banks resorted to writing off defaulted loans to reduce the burden of NPAs on their balance sheets. However, the recovery from these written-off loans has been very low – Rs 30,104 crore in FY21, Rs 33,534 crore in FY22, and Rs 45,548 crore in FY23.
The Ongoing Challenge of Non-Performing Assets: Loan Write-Offs and Recovery Concerns
When a bank writes off a loan, it removes it from the asset book because the borrower has defaulted on the repayment, and the chances of recovery are minimal. Nevertheless, banks are still expected to make efforts to recover these loans using various options and make necessary provisions. The write-offs also affect the tax liability of the banks, as the written-off amount is deducted from their profits.
Dealing with non-performing assets, including loan write-offs and recovery concerns, remains an ongoing challenge. A loan becomes a non-performing asset (NPA) when the principal or interest payment remains overdue for 90 days.
The identity of borrowers whose loans have been written off, whether large or small, has never been disclosed by the banks or RBI. Notably, public sector banks accounted for the majority of write-offs at Rs 366,380 crore, which was about 62.45 per cent of the total exercise in the last three years.
As per RBI guidelines on write-offs, in a deregulated credit environment, banks are advised to make credit-related decisions, including waiving off bad loans, based on their commercial assessment of loan viability and subject to prudential norms issued by the RBI.
The recovery process for these written-off loans can be lengthy, especially since many of these loans belong to wilful defaulters and unscrupulous promoters who tend not to repay their debts. Critics have expressed concerns about the lack of transparency and proper policies surrounding loan write-offs, particularly when it involves a significant amount of public money.
As per the RBI’s Financial Stability Report for June 2023, in the event of a moderate or severe stress scenario in the macroeconomic conditions, the GNPA ratio could increase to 4.1 per cent and 5.1 per cent, respectively.
