What is loan write-off and why is it done?
Loan write-off is a process by which banks remove the bad loans or non-performing assets (NPAs) from their balance sheet after a period of non-repayment by the borrowers. This is done to clean up the bank’s books, avail tax benefits, and optimise capital. However, write-off does not mean that the loan is waived off or forgiven. The banks still have the right to recover the money from the defaulters through legal means.
According to the Reserve Bank of India (RBI), the NPAs are classified into different categories based on the duration and the likelihood of recovery. These are sub-standard, doubtful, and loss assets. The loss assets are those where the recovery is considered uncollectible and there is no security or collateral available. These are the ones that are usually written off by the banks.
How much loan write-off has been done by public sector banks?
In a recent reply to an RTI query filed by Moneylife, the RBI has revealed that the public sector banks (PSBs) have written off loans worth Rs 3.66 lakh crore in the last three fiscal years, from 2020-21 to 2022-23. This is nearly 62.45% of the total loan write-off done by all scheduled commercial banks (SCBs), which amounted to Rs 5.86 lakh crore in the same period.
The PSBs that have written off the highest amount of loans are State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), and Canara Bank. SBI alone has written off Rs 1.23 lakh crore, followed by PNB with Rs 47,260 crore, BoB with Rs 45,260 crore, and Canara Bank with Rs 39,164 crore. The other PSBs that have written off more than Rs 10,000 crore are Bank of India, Union Bank of India, Indian Bank, and Central Bank of India.
How much loan recovery has been done by public sector banks?
The RBI has also disclosed the amount of loan recovery done by the PSBs from the written-off accounts in the last three years. The total recovery by the PSBs is Rs 99,996 crore, which is only 18.60% of the total loan write-off. This means that the PSBs have failed to recover more than 80% of the written-off loans from the defaulters.
The PSBs that have recovered the highest amount of loans are SBI, PNB, BoB, and Indian Bank. SBI has recovered Rs 37,636 crore, followed by PNB with Rs 12,027 crore, BoB with Rs 9,481 crore, and Indian Bank with Rs 8,764 crore. The other PSBs that have recovered more than Rs 5,000 crore are Canara Bank, Bank of India, and Union Bank of India.
What are the implications of loan write-off for the economy and the taxpayers?
The loan write-off by the PSBs has several implications for the economy and the taxpayers. First, it reduces the profitability and the capital adequacy of the PSBs, which affects their ability to lend more and support the economic growth. Second, it increases the fiscal burden on the government, which has to infuse more capital into the PSBs to keep them afloat. Third, it erodes the confidence and the trust of the depositors and the investors in the banking system, which may lead to financial instability. Fourth, it encourages the moral hazard and the wilful default by the borrowers, who may take advantage of the lenient recovery mechanism and the political interference. Fifth, it deprives the taxpayers of their hard-earned money, which could have been used for more productive and welfare-oriented purposes.
Therefore, it is imperative that the PSBs improve their governance, risk management, and recovery processes to prevent the accumulation and the write-off of bad loans. It is also important that the RBI and the government ensure more transparency, accountability, and regulation of the banking sector to safeguard the public interest and the financial stability.