Banks have struggled to recover written-off loans for two decades
5 min read 27 Dec 2022, 11:07 PM ISTDebt write-offs are not waivers but recovery data has long shown that lenders get very little back.
PremiumWrite-offs are not waivers. This is something that successive finance ministers over the years have emphasized. And they are right about it, at least in theory. But some data shared by the ministry of finance on 19 December in response to questions raised in the Lok Sabha tells us a totally different story.
In the last five financial years (2017-18 to 2021-22) scheduled commercial banks in India have written off loans worth around ₹10.1 trillion. A bulk of these loans have been written off by public sector banks that are majority owned by the government. These banks have together written off loans worth ₹7.35 trillion.
In fact, the way the ministry of finance presented that data in the Lok Sabha, it considered IDBI Bank to be a public sector bank only up to 2017-18. After that, Life Insurance Corporation (LIC) of India became the major owner of IDBI Bank, and hence, it isn’t considered to be a public sector bank. While this is technically correct, the fact of the matter is that LIC also is a financial institution that is majorly owned by the government, hence, it’s only fair to say that IDBI Bank continues to be a government owned financial institution.
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Given this, once we add the write-offs of IDBI Bank for the period 2018-19 to 2021-22, the total write-offs of public sector banks go up to ₹7.68 trillion or a little over three-fourths of the overall write-offs carried out by banks.
Now it is important to understand when exactly a bank writes off a bad loan. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more. And loans which have been bad loans for four years can be dropped from the balance sheet of a bank by way of a write-off. Of course, before doing this, a 100% provision needs to be made for these bad loans. In that sense, a write-off is an accounting eventuality.
Further, this does not mean that a bank has to wait for four years before it can write off a loan. If it feels that a particular loan is unrecoverable, the loan can be written off before four years as well.
So, does that mean that once a loan is written off, it’s no longer recoverable? The answer is ‘no’. In fact, almost all the bad loans written off are what are referred to as technical write-offs. The Reserve Bank of India (RBI) defines technical write-offs as bad loans which have been written off at the head-office level of a bank, but remain as bad loans on the books of branches, and, hence, recovery efforts continue at the branch level. Hence, a loan that is written off can still be recovered. And it is precisely this point which has led to several finance ministers over the years telling us that write-offs are not waivers.
Data shared by the ministry of finance in the Lok Sabha provides details of written-off loans recovered by our public sector banks over the last five years. It amounts to ₹1.03 trillion. In comparison with the loans written off during this period ( ₹7.35 trillion), this is a small amount. Also, the total written-off loans recovered by public sector banks in the last five years was 14% of the total loans written off during the period. Of course, it needs to be pointed out here that the written-off loans recovered during the last five years could possibly have been written off even before 2017-18.
Further, this inability to recover written-off loans isn’t really a recent problem. The late K.C. Chakrabarty, who was a deputy governor of RBI between 2009 and 2014, gave a speech in November 2013 in which he shared data on the loans written off by public sector banks during the period 2000-01 to 2012-13. He also shared data on the written-off loans recovered by these banks. During the period he referred to, public sector banks wrote off loans worth ₹1.45 trillion, while the recovery of written-off loans stood at only ₹33,950 crore. It is worth remembering here that at the time Chakrabarty gave that speech, bad loans hadn’t really become the kind of problem for public sector banks that they eventually did.
Things didn’t improve even after 2013. The 68th report of the Standing Committee on Finance published in August 2018 pointed out that during the period 2014-15 to 2017-18, public sector banks wrote off loans worth ₹3.17 trillion and recovered ₹44,900 crore of the written-off loans. The total written-off loans recovered by public sector banks stood at 14% of the total loans written off during the period, as has been the case in the last five financial years as well. In fact, as the Standing Committee report points out, the recovery rate of private banks had stood at just 5% during the period under consideration. Of course, here it is important to bear in mind that “recovery takes place on total cumulative write-off and not only on write-off for a specific period".
So, what does all this tell us?
It tells us that banks in the country basically struggle to recover loans that they have written off. Hence, as is the case with many other aspects of life, and irrespective of what various finance ministers have wanted us to believe over the years, theory is very different from practice. Write-offs are what they sound like. And this has been true over the last two decades.
Vivek Kaul is the author of ‘Bad Money’.
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