What is a loan write-off and why do banks do it?

Source: The post is based on the article “What is a loan write-off and why do banks do it?” published in Indian Express on 23rd November.

What is the News?

According to RBI data, banks wrote off more than Rs 10 lakh crore in loans over the last five years. They have been able to recover only 13% of the Rs 10 lakh crore they wrote off.

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.  The tax liability will also come down as the written-off amount is reduced from the profit.

What is the amount written off by private banks and public sector banks?

Private banks wrote off loans worth Rs 2.7 lakh crore in the last five years in their effort to bring down NPAs and whitewash their balance sheets. This works out to 27.28% of the total write-off of the last five years.

On the other hand, Public sector banks reported the lion’s share of write-offs at Rs 734,738 crore accounting for 72.78% of the total write-off.