LOAN WRITE-OFF
1. Context
Banks wrote off more than Rs 10 lakh crore in loans over the last five years, according to the RBI data. They have been able to recover only 13% (Rs 1,32,036 crore) of the Rs 10,09,510 crore ($123.86 billion) they wrote off. While public sector banks reported the lion's share of write-offs at Rs 734,738 crore, private sector banks were not far behind in bringing down their non-performing assets (NPAs). Private banks accounted for 27.28 percent of the total banking sector write-offs over the last five years, the RBI's reply shows.
2. 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. An additional benefit is that the amount so written off reduces the bank's tax liability.
3. Why do Banks resort to Write-offs?
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 a loss.
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. The tax liability will also come down as the written-off amount is reduced from the profit.
However, the chances of recovery from written-off loans are very low- as the RTI reply shows-which raises questions about the assets or collateral against which the banks lent funds to these defaulters.
4. What is the amount written off by Private Banks?
Private banks wrote off loans worth Rs 2,74,772 crore in the last five years in their effort to bring down NPAs and whitewash their balance sheets. This works out to 27.28 percent of the total write-off of Rs 10,09,510 crore of the banking sector. Private banks wrote off Rs 53,000 crore in 2018-19 and Rs 58,293 crore in 2019-20 when the entire banking sector witnessed the maximum loan write-offs.
5. Who is at the forefront of write-offs?
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. The loans written off by the banks are the depositor's money.
6. How much did PSU banks write off?
Public sector banks reported the lion's share of write-offs at Rs 734,738 crore accounting for 72.78 percent 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, Punjab National Bank Rs 67,214 crore, and Bank of Borada Rs 66,711 crore.
7. Write-off loans advantages in India
It helps a bank or lender to set free the money originally blocked for a borrower. The money can be now utilized by banks for doing their business.
Clean balance sheet: Writing off a bad loan does not mean that the bank will lose the legal right to recover the due amount, So, any recovery made against a bad loan after writing it off is considered a profit for the bank in the year of recovery.
It helps the bank to make its balance sheet clean.
Generate revenue: When a loan is written off, the lender or bank receives a tax deduction on the loan value. But the lender is still legally allowed to pursue the debt and generate revenue from it.
For Prelims
| For Prelims: Non-performing assets (NPAs), Reserve Bank of India(RBI), Loan write-off, Tax liability, Clean balance sheet. |
Source: The Indian Express
