Banks write off bad loans worth Rs 2.09 lakh crore in 2022-23: RBI

Source: The post is based on the article “Banks write off bad loans worth Rs 2.09 lakh crore in 2022-23: RBI”  published in Indian Express on 24th July 2023.

What is the News?

According to the Reserve Bank of India, banks have written off bad loans worth over Rs 2.09 lakh crore during the year ended March 2023 taking the total loan write-off by the banking sector to Rs 10.57 lakh crore in the last five years.

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.

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.

Once recovered, the provisions made for those loans flow back into the profit and loss account of banks.

What do the RBI guidelines say on Loan write-offs?

The RBI guidance on write-offs says that in a deregulated credit environment, banks have been advised to take credit related decisions including waiving off bad loans as per their commercial assessment of the viability of the loans in terms of their board approved policies subject to prudential norms issued by the RBI. 

The policy on loan recoveries is required to lay down the manner of recovery of dues, targeted level of reduction (period-wise), norms for permitted sacrifice or waiver, factors to be taken into account before considering waivers, decision levels, reporting to higher authorities and monitoring of write-off and waiver cases.

However, the recovery process can take years as most of the loans involved in write-offs belong to wilful defaulters and shady promoters who generally don’t pay back to the banks.