Banks recover a pitiful proportion of massive amounts of bad loans they have written off

Between April 2014 and December 2017, public sector banks recovered a pitiful 10.7% of the massive Rs2.7 trillion worth of loans they wrote off during the period, shows a reply to a question in the Rajya Sabha.

Written off loans are essentially those bad loans where the banks find it futile to put in too much of an effort for recovery and progressively make 100% provisioning so as to completely erase them from their balance sheets. So over a period of four years, loans that decay beyond redemption are set off with profits generated within the bank (provisions) and then written off.

State Bank of India along with its associates was responsible for 38% of the written-off account pile at Rs1.02 trillion. That is 5% of its advances book as of December 2017. Punjab National Bank was second with a cumulative write-off of Rs27,814 crore or 6.6% of its loan book. IDBI Bank Ltd came third in the loan write-off league having written off Rs16,568 crore worth of loans.

The adjoining chart shows the poor recovery rate from written-off accounts. What does such a low recovery rate say about banks, their borrowers and those who default?

Written-off loans are those non-performing assets (NPAs) that banks do not see the merit of keeping on their balance sheet. Defaulters who haven’t paid for four years are considered loss assets and written off. It is indeed futile for banks to pursue them with the same vigour as they do an NPA, especially as recovery and resolution processes such as debt recovery tribunals or even the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act too can’t ensure repayment.

But one cannot ignore the growing pile of written-off accounts over the recent years. True, not all borrowers wilfully default and some are genuinely distressed. But to borrow the phrase from former Reserve Bank of India governor Raghuram Rajan, promoters do not have the divine right to recapitalize their failed ventures with bank money. Defaulters should be pursued and made to pay up especially if such default is found to be wilful.

Even as bankers are currently focused on how to resolve and recover money from the 50 large borrowers accounting for Rs3 trillion worth of bad loans, it is imperative to also monitor those who have gone scot-free simply because their loans no longer exist on bank balance sheets.