Loan Write-Offs
Context:
Recently, the commercial banks in India achieved a 12-year low NPA ratio of 2.8% of advances as of March 2024 due to large-scale loan write-offs over the past few years.
Relevance:
GS-03 (Economy)
Key Highlights:
- A huge sum of Rs 12.3 lakh crore (Rs 9.9 lakh crore in the last 5 years (FY 2020-2024)) was written off by the Indian commercial banks, of which the public sector banks (PSBs) accounted for 53% (Rs 6.5 lakh crore) of the total write-offs.
- The maximum amount of write-off happened in FY 2019-2020 after the asset quality review.
- More than 81% of the written-off loans were from wilful defaulters, and over Rs 8 lakh crore remained unrecovered.
- NPA ratios:
- As of September 2024, the NPAs of PSBs and private sector banks (PSBs) stood at Rs 3.16 lakh crore and Rs 1.34 lakh crore, respectively.
Loan Write-Offs vs. Waive-Offs:
- When a bank removes a loan from its asset records, stating that it is no longer expecting to recover the amount, we then call that the loan has been written off.
- Banks indulge in writing off to clear their balance sheets of NPAs and to improve their financial health, which allows them to focus on recoverable assets and manage their tax liabilities.
- On the other hand, a loan write-off is when the bank decides to provide such borrowers with a loan write-off, who cannot repay the money they have borrowed. Since a waiver involves complete cancellation of the loan, the lender has to return the ownership of the collateral to the borrower.
- In a write-off, the lender (bank) can use legitimate methods to get back the loan amount since the loan account did not close permanently during the loan write-off process.
- One similarity in write-offs vs. waivers is that it reduces the bank’s tax liability.
What is a non-performing asset (NPA)?
- Definition: NPA refers to loans or advances that are in default or overdue on scheduled payments of principal or interest.
- For agricultural loans, a loan granted for short-duration crops will be treated as NPA if the installment of principal or interest thereon remains overdue for two crop seasons.
- Classification: Loans are classified as non-performing if payments are overdue for at least 90 days.
- Gross NPAs: The total amount of defaulted loans acquired by individuals from a financial institution.
- Net NPAs: The amount realised after deducting provisions from the gross non-performing assets.
What is a bad bank?
- Purpose: A bad bank is established to buy NPAs (bad loans) from banks to relieve their balance sheets.
- Function: By removing bad loans, banks can lend more freely without the constraints of stressed assets.
- Operations: After acquiring bad loans, the bad bank may restructure and sell these NPAs to interested investors.
- Profitability: A bad bank can profit if it sells loans at a higher price than the purchase cost, though profit-making is secondary to easing the burden on banks and encouraging active lending.
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