Bad loans are first written-off, then waived

Outside the Eco-Chamber

Bad loans and write-offs of these loans are in the news again. In 2022-23, commercial banks were reported to have written off loans worth Rs 2.09 lakh crore. This set the social media abuzz. Those against the current central government looked at this as squandering public money. Those in favour of it pointed out with great confidence that write-offs are not waivers and even loans that have been written off can be recovered in the days to come.

The truth, as always, is a lot more complicated.

Bad loans are largely loans that haven’t been repaid for a period of 90 days or more. As of March 2023, the overall bad loans of commercial banks stood at Rs 5.72 lakh crore. This works out to a bad loans rate, as a percentage of total loans, of 3.9%. As of March 2018, these figures had stood at Rs 10.36 lakh crore and 11.2%.

So, it is clear that overall, bad loans have fallen in the past five years. How did this happen? A major reason for this is the fact that banks have written off loans. In fact, loans that 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; that is, banks need to set aside enough money to meet the losses that they incur due to bad loans. So, in that sense, a write-off is really an accounting eventuality.

Also Read | Govt has recovered bad loans worth Rs 10 lakh crore: Finance Ministry

Over the last five years, banks have written off loans worth Rs 10.57 lakh crore. Of course, they have accumulated newer bad loans during the period. They have also recovered bad loans before they could be written off.

Falling bad loans is a logical outcome of the fact that banks started recognising bad loans only from 2014-15 onwards. Before that, the banks, particularly public sector banks (PSB), had hidden their bad loans in different ways. As of March 2013, the overall bad loans of banks had stood at Rs 1.94 lakh crore, jumping to Rs 10.36 lakh crore by March 2018. The bad loans had stood at Rs 9.15 lakh crore as of March 2019.

In the last few years, these loans, which have been bad loans for four years or more, have been written off and dropped from the balance sheets of banks.

Further, almost all the bad loans written off are what are referred to as ‘technical write-offs’. The Reserve Bank of India defines technical write-offs as bad loans that 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. Given this, a loan that is written off can still be recovered. And it is precisely this point that everyone who supports the government of the day tends to make.

In fact, as the government, in reply to a question recently raised in the Lok Sabha, said: “Such write-off does not result in waiver of liabilities of borrowers to repay as borrowers of written-off loans continue to be liable for repayment.” The trouble is, while this is true in theory, it doesn’t work in practice.

As The Indian Express has pointed out, of the total loans of Rs 5.87 lakh crore written off during the last three years, the banks recovered only around Rs 1.09 lakh crore, which is less than a fifth of the loans written off. In fact, in a reply to a question in the Lok Sabha in December 2022, the government had pointed out that from 2017-18 to 2021-22, of the total loans worth Rs 7.35 lakh crore written off by the PSBs, only loans worth Rs 1.03 lakh crore were recovered. This amounts to a rate of recovery of 14%.

The 68th report of the Standing Committee on Finance, published in August 2018, pointed out that during 2014-15 to 2017-18, PSBs wrote off loans worth Rs 3.17 lakh crore and recovered Rs 44,900 crore from them. This again is rate of recovery of 14%. In fact, this is how things were even before 2014.

So, it is safe to say that in theory, loans that are written off can be recovered, but in practice, a bulk of the loans which are first written-off are later simply waived off, because they can’t be recovered. And that is too complicated a story to be turned into a social media post.