Note4Students

From UPSC perspective, the following things are important :

Prelims level: Loan Write-Off

Mains level: NPAs

Banks have written off bad loans worth ₹10,09,511 crore during the last five financial years, finance minister informed the Parliament.

What is a loan write-off?

Writing off a loan essentially means it will no longer be counted as an asset.
By writing off loans, a bank can reduce the level of non-performing assets (NPAs) on its books.
The bank moves the defaulted loan, or NPA, out of the assets side and reports the amount as a loss.
An additional benefit is that the amount so written off reduces the bank’s tax liability.
The loans written off by the banks are the depositors’ money.

Why do banks resort to write-offs?

Recovery issues: The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very low chance of recovery. However, the chances of recovery from written-off loans are very low.
Provisioning: After the write-off, banks are supposed to continue their efforts to recover the loan using various options. They have to make provisioning as well.
Reduce tax liability: The tax liability will also come down as the written-off amount is reduced from the profit.

Public sector banks reported the lion’s share of write-offs at Rs 734,738 crore accounting for 72.78 per cent of the exercise.
Among individual public sector banks, reduction in NPAs due to write-offs in the case of State Bank of India Rs 204,486 crore in the last five years.
Among private banks, ICICI Bank’s reduction in NPAs due to write-offs was Rs 50,514 crore in the last five years.
Axis Bank wrote off Rs 49,715 crore and HDFC Bank Rs 34,782 crore during the period, according to the RBI.

Since the loan account is not closed in write-off, the right to recovery of the amount is not waived by the lender or the bank.
The bank or lender can try to recover the loan amount from the loan defaulter.

A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.

Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
Loss assets: As per RBI, “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.”