The government and policy-makers keep reiterating that writing off a bad loan does not mean the bank cannot recover it. When a bad debt is written down, some bad loan value remains as an asset because the lender expects to recover it. But it hardly happens. Especially for public sector banks (PSBs), the recovery from bad loans written off is relatively low. If fact, according to information provided by the Union government in Parliament, from FY17-18 to FY21-22, all scheduled commercial banks (SCBs) recovered just 13% of the loans written off.
For example, since FY17-18, the State Bank of India (SBI) wrote off bad debts worth Rs2.29 lakh crore but recovered just 20.95% or Rs48,104 crore.
An analysis done by social activist and SBI's shareholder Vivek Velankar shows that between FY17-18 and FY19-20, the lender's recovery from written-off loans remained below 18%. In fact, in FY17-18, it was just Rs5,333 crore or 13.26%, while the written-off loan was Rs40,196 crore.
However, over the next three years, SBI recovered more bad loans; but the maximum reached was less than 40%. In FY21-22, out of the written-off bad debt of Rs19,705 crore, SBI managed to recover Rs7,782 crore.
According to Mr Velankar, the writing off of bad loans shows that banks are reluctant to follow the rules and laws passed by the Union government to recover loan amounts from big borrowers. In fact, he says, "Banks are more interested in writing off loans of these big defaulters to show a smaller amount under non-performing assets (NPAs) and maybe there is a nexus among bankers and these defaulters resulting in banks not showing much interest in recovering written-off debt."
"Also, since these written-off loans are not part of the balance sheet, nobody even looks at them. Since this method of writing off loans is being rampantly used by banks, the Union finance ministry and the Reserve Bank of India (RBI) need to take strong action against banks indulging in such practices," he added.
As per RBI guidelines and policy approved by banks' boards, NPAs, including those in respect of which full provisioning has been made on completion of four years, are removed from the balance sheet of the bank concerned by way of the write-off.
In its annual report for FY22-23, SBI says the resolution has been achieved in some high-value NPA accounts referred to the national company law tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC). A total of 1,075 cases were referred to the NCLT as of 31 March 2023, out of which 882 cases have been admitted. Furthermore, 196 cases have been resolved, including some high-value accounts, it added.
Major NPA accounts of SBI are from industries like power, telecom, trading, roads & ports, infrastructure and other categories. The remaining portion of the gross NPA of SBI is from agriculture, personal and micro, small and medium enterprises (MSMEs). The gross NPAs (GNPAs) from the agriculture and personal segment at 33% and 8% of total GNPAs, respectively, also form part of other categories.
Earlier in February, the Union government informed the Lok Sabha that all scheduled commercial banks (SCBs) wrote off Rs10.09 lakh crore from FY17-18 to FY21-22. At the same time, the Union government infused Rs2.76 lakh crore to recapitalise PSBs.
In a written reply, Dr Bhagwat Karad, minister of state for finance, says, "As banks write-off only those NPAs, which have been fully provided for, and continue their efforts to recover the dues, write-off exercise does not amount to misappropriation of funds."
According to the minister, capital is infused by the Union government in PSBs from time to time to supplement their efforts to meet capital requirements. "Capital amounting to Rs2,76,043 crore infused in PSBs since FY17-18 has been funded through recapitalisation bonds issued by the government and subscribed by the recapitalised banks for the full amount of capital infused."
Over the past nine years, from FY13-14 up to FY21-22, SBI has written off bad loans of over Rs145,248 crore of big defaulters with an outstanding of Rs100 crore and more, while recovering just over 13%.
Technically speaking, when debts are written off, they are removed as assets from the balance sheet because the bank does not expect to recover payment.
This practice is frowned upon by experts but is routinely followed by banks as part of their tax management clean-up process. The beneficiaries are invariably some of our biggest industrialist defaulters.