NPA Crisis

What is a Loan Write-Off?


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.

Who is at the forefront of write-offs?

  • 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.

What about recovery of such loans?

  • 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.

Back2Basics: Non-Performing Assets (NPAs)

  • 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.
  1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
  2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  3. 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.”

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