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Friday, 07 Jan 2022
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By Vivek Kaul

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Statistics are like bikinis, and bad loans of banks are at a six-year low

Reality is always more complex than our means of representing it – Jason Stanley, How Fascism Works – The Politics of Us and Them.

Before Navjot Singh Sidhu became a politician, he was a pretty good opening batsman and a half-decent cricket commentator. Of course, the entertainment show that he did with Kapil Sharma made him as famous as he is across the country.

Sidhu’s commentary laced with stolen quotes came as a relief from other cliché mouthing commentators who loved to put the peddle on the accelerator so that it moved like a tracer bullet, ensuring that all the three results were possible at the same time.


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Sidhu’s most famous line of them all was: “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.” A whole generation grew up on it. But, of course, almost no one knows that this was originally said by Aaron Levenstein, an American professor of business administration, who lived through much of the twentieth century and died in 1986.

The point is that a statistic is incomplete without the right context and without a proper enunciation of how it is calculated.

For example, take the gross non-performing assets (NPAs) of banks or bad loans as they are more popularly known. They are largely loans that haven’t been repaid for 90 days or more. When these loans are expressed as a percentage of total loans given by banks, we get the bad loans rate, or gross NPAs expressed in percentage form.

In the last week of December, the Reserve Bank of India (RBI) published the latest gross NPA rate. What the rate revealed was important but what it concealed was vital.

Take a look at the following chart. It plots the bad loans rate of commercial banks (public sector banks, private banks, foreign banks and small finance banks) over the years.

The bad loans’ rate as of September 2021 fell to 6.9%, the lowest it has been since March 2015, when it was 4.3%. It has also come down from a record high of 11.2% as of March 2018.

The business media went on an overdrive reporting this number as good news, without really explaining the context or how the bad loans rate is actually calculated. If it had done that, it would be evident that this is a natural progression of things. It’s like the human body responding to medical treatment, the immune system taking over, and the body healing over time.

Let’s try and understand this in detail

The latest data for the bad loans rate is as of 30 September. But when it comes to bad loans in absolute terms, the latest data available is as of 31 March. So, we will have to make do with that. As of 31 March, banks’ bad loans stood at around Rs 8.38 trillion.

How did we arrive at Rs 8.38 trillion? We considered the total bad loans as of 31 March 2020, added the fresh bad loans accumulated during the year, then subtracted the reduction in bad loans during the year and then further subtracted the write-offs during the year.

The bad loans as of 31 March 2020 stood at Rs 7.64 trillion. Rs 4.01 trillion of fresh bad loans were added during the year. There was a reduction in bad loans of Rs 1.19 trillion during the year. And finally, there was a write-off of bad loans worth Rs 2.08 trillion.

Hence, we add the bad loans of Rs 7.64 trillion with Rs 4.01 trillion of fresh bad loans and then subtract the reduction of Rs 1.19 trillion in bad loans and the write-off of Rs 2.08 trillion. This gives us bad loans number of Rs 8.38 trillion as of 31 March 2021.

The total advances of Indian banks as of 31 March stood at around Rs 114 trillion. So, bad loans of Rs 8.38 trillion divided by overall advances of Rs 114 trillion gives us a bad loans rate of 7.3% as of March 2021. The calculation for September 2021 can be done similarly, subject to all data points being available.

This is how the bad loans rate is calculated. Now I could have spared you the maths here, but I didn’t do that because I wanted you to understand that write-offs are a vital part of calculating bad loans. They bring down the bad loans number and, as a result, the bad loans rate.

What are write-offs?

First and foremost, they are not waive-offs, as is often suggested on WhatsApp forwards. Loans categorized as bad loans for four years can be removed from banks’ balance sheets through write-offs. This implies that a write-off is basically an accounting practice.

Before a bad loan is written-off, the bank needs to provide for the loan’s total amount. This means that the bank needs to set aside enough money over a period of four years to meet the losses on account of a bad loan. Also, the bank need not necessarily wait for four years to write off a bad loan. It can do that earlier as well if a particular loan is unrecoverable in its assessment.

Take a look at the following chart, which plots the write-offs carried out by banks over time.

The total loans written-off in 2020-21 stood at Rs 2.08 trillion. This helped in reducing bad loans to that extent. Largely, these must be loans first recognized as bad loans in 2016-17. That year banks recognized new bad loans worth Rs 4.16 trillion. Four years later, in 2020-21, some of these loans remained unrecovered. Over the four years, banks set aside money to write off these bad loans. This is how the accounting process worked.

Interestingly, in 2015-16, banks had recognized fresh bad loans worth Rs 4.42 trillion, and in 2019-20, the banks wrote-off loans worth Rs 2.38 trillion. Further, in 2017-18, banks recognized fresh bad loans worth Rs 6.04 trillion. This means the write-offs during the current financial year will be even bigger and, in turn, pull down the bad loans number and rate down even further, subject to the condition that the the accumulation of fresh bad loans doesn’t go up dramatically.

As the Report on Trend and Progress of Banking in India for 2019-20 had pointed out: “The reduction in NPAs during the year was largely driven by write-offs.” The same reason can be attributed for the reduction in bad loans in 2020-21 as well.

Take a look at the following chart. It plots the absolute bad loans number of banks as of the end of the financial year over the years.

As can be seen from the above chart, banks were very slow to recognize their bad loans as bad loans until March 2015. They found different ways to kick the bad loans can down the road. In mid-2015, the RBI started pushing banks, particularly public sector banks, to recognize their bad loans strictly. As of March 2015, the bad loans stood at Rs 3.23 trillion. By March 2018, they had jumped to Rs 10.40 trillion. In the process, the banks managed to start cleaning up their Augean stables.

Only once the banks had properly recognized their bad loans could they write off bad loans, which had been bad loans for four years. This explains why write-offs have increased over the years, and hence, the overall bad loans have come down. This is the healing impact of the RBI forcing the banks to start recognizing their bad loans. If that hadn’t happened back in 2015, the banks, especially public sector banks, wouldn’t currently be recovering.

This clean-up is also because many public sector banks were placed under the prompt corrective action framework. Under this framework, limitations were placed on the lending as well as deposit raising of public sector banks. This, in a way, ensured that the banks did not end up making more loans which could turn bad in the future.

There is another point that needs to be made here. Between March 2011 and March 2021, bad loans worth Rs 11.23 trillion were written off. As of March 2021, the total bad loans outstanding stood at Rs 8.38 trillion. Adding these two numbers tells us that bad loans worth Rs 19.6 trillion have been recognized in the last decade. The true picture doesn’t really come out without considering the write-offs while talking about bad loans.

A slight detour

The term write-off suggests that once a loan is written off, it’s gone forever and is no longer recoverable. In India, things work a little differently. In fact, almost all the bad loans written off are what are termed as technical write-offs.

The RBI defines technical write-offs as bad loans written off at the head office level of the bank but remains as bad loans on the books of branches and, hence, recovery efforts are supposed to continue at the branch level. If a bad loan that was technically written off is partly or fully recovered, the amount is declared as the bank’s other income.

The question is, are loans that have been written off actually recovered? I couldn’t find the latest data, but nonetheless, between March 2014 and March 2018, around 14% of loans that were written off were recovered.

Where did the money to keep banks running come from?

As mentioned earlier, bad loans can be written off only when enough money has been set aside to recognize the loss on account of them. In technical terms, this is referred to as provisioning. This provisioning happens against the bank’s net worth which includes the capital invested by its owners and the profits retained after paying dividends over the years.

Of course, if the bad loans to be written off are huge, the bank runs the risk of eroding the net worth against which bad loans can be written off. So, for a bank to keep operating and maintaining an adequate amount of capital at the same time, it needs fresh investments from its owners.

The central government is the owner of public sector banks. So, over the years, it has invested a lot of money in them to keep them going. This peaked in 2015-16 and 2016-17 at around Rs 0.25 trillion, each.

Between 2010-11 and 2017-18, the central government made fresh investments of Rs 1.12 trillion to recapitalize public sector banks and keep them going. All this money came from the different taxes paid by citizens, and regular allocations were made for this in the government’s annual budget. As they say, there is no free lunch in economics.

Interestingly, the fresh investment of Rs 1.12 trillion does not tell us the complete story. In October 2017, the government announced that it would use bonds to recapitalize the public sector banks. In 2017-18, the government issued recapitalization bonds worth Rs 0.8 trillion. This was followed by the issue of recapitalization bonds worth Rs 1.06 trillion in 2018-19 and Rs 0.65 trillion in 2019-20. In 2020-21, bonds worth Rs 0.2 trillion were issued. As of 30 September, the government had issued recapitalization bonds worth Rs 2.86 trillion.

So, what is happening here?

When the government made direct investments in public sector banks, it made allocations for it in the budget. As a result, the government’s fiscal deficit, or the difference between what it earns and what it spends, also went up. Given that, the government came up with a way of getting around this problem.

It started issuing bonds to recapitalize the public sector banks. The public sector banks bought these bonds using their deposits. The government then reinvested this money in the public sector banks and helped them recapitalize. So, in this way, deposits were turned into capital.

This way of recapitalizing government banks is what economists call budget-neutral as the government wasn’t incurring any immediate expenditure on recapitalizing state-run banks.

Still, an interest has to be paid on these bonds every year, which is accounted for in the budget. In 2019-20 and 2020-21, the interest paid by the government amounted to Rs 0.16 trillion and Rs 0.25 trillion, respectively. Also, there is the elephant in the room.

By selling these bonds, the government has only managed to kick the can down the road. When these bonds mature, they will have to be repaid by the government at that point in time. The first recapitalization bonds worth Rs 0.13 trillion mature only in March 2028. They continue to mature until 2035.

In that sense, the recapitalization bonds are like the oil bonds issued by governments of yore to compensate oil marketing companies for the under-recoveries they incurred while selling petrol, diesel, kerosene and domestic cooking gas. These bonds were issued primarily in the 2000s and have started to mature in 2021 and will continue maturing until 2026.

As the old French saying goes, the more things change, the more they remain the same. Only the scale grows.

To conclude, the story of bad loans falling is a complicated one, but if I were to make a simplistic statement, it is like the human body simply being allowed to heal over a period by letting the correct remedy run its course. Any sustainable change is a long-term process and can’t happen overnight. This is an excellent example of it.

Of course, this does not mean that banks are out of the woods totally. At 6.9%, the bad loans rate is still on the higher side. But, hopefully, it will keep coming down as banks lend more, and the loans will be repaid. Further, my guess is, the negative economic impact on bank loans is yet to be factored in totally.

To conclude, it is worth remembering what Jer Thorp writes in Living in Data: “To know data we need to be able to look at the end-to-end process of it, to view data…as a system and a process.”


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Written by Vivek Kaul. Edited by Saikat Chatterjee. Produced by Nirmalya Dutta. Send in your feedback to

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