Background
FY 2017-18 was a year of frauds, with Punjab National Bank, the fourth-largest bank in the country was defrauded with Rs.14357 crore, the largest in Indian banking history. The bank ended up with record loss of Rs.12130 in March 2018 compared to the profit of Rs.1187 crore in the previous fiscal. The bank had to completely provide for the defrauded amount and wrote off the loan along with other NPA loans. Wilful default, frauds or for any reasons, majority of the banks recorded loss that year.
So, is it the nature of the loan, that causes write off? Whether a loan is written off because of political pressure? Whether we can have a different treatment to a loan not repaid? And most importantly why a spurt in write off of loans in recent years? What are the underlying principles behind writing off loans?
Can a Bank keep an NPA in books for perpetuity?
A loan is categorised as a bad loan or Non-Performing Asset (NPA) by Banks or Financial Institutions based on Income Recognition and Asset Classification (IRAC) norms circulated by Reserve Bank of India (RBI). Banks are bound to set aside provision as per instructions of RBI, and generally, a loan will be fully provided for four years. After being fully provided against the outstanding, the next step is to write off from the books of the Bank. If the loan is a completely unsecured, or fraudulent one, as in the case of PNB, complete provisioning is to be provided in the first year of identifying fraud and or default.
Table 1
Indicative Provisioning Norm for NPA Accounts
(Indicative IRAC provisioning norms, as per RBI instructions, may differ for certain sectors)
So, a loan has to be categorised as NPA if the default for an instalment is due for more than 90 (general rule - days differ for certain sectors) days. If it is categorised as NPA account, provisioning follows. And once it is fully provided, the loan has to be written off from balance sheet or it is no more in the balance sheet of the Bank.
What happens once the loan is written off? What is write off?
There are two parties to the loan: the Bank and the borrower. Before looking into what would happen after write off, it is pertinent to see what happens before write off
Table 2
From an SGSY or IRDP loan of a meagre amount which is under revenue recovery to large corporate loans under IBC proceedings, majority of the loans under recovery process would not be there in the balance sheet of the Bank.
What is the accounting process
Once the loans are written off, using the provision, which was set apart from the profit of the Bank, the outstanding is transferred to a dummy account for follow up and recovery. In SBI, the largest lender of the country, this account is known as Advance Under Collection Account (AUCA) and 83% of these accounts are maintained by designated recovery branches.
Amounts recovered against debts written off in earlier years are recognised as revenue in the year of recovery. These recovered amounts are separately reported in the annual reports of the bank and reported to RBI periodically.
NPA of Indian Commercial banks:
Figure 1
The trend in write off by Commercial Banks :
The trend of write off is going north year after year. Before going into the reasons for the spur, let us look at the figures:
Table 3
Loans Written off by Commercial banks during the period 2010 to 2019 (Rs.in crores)
(Source: RBI data)
The above table shows a sudden increase in write off from 2013, with a steep upward movement from 2015.
Reasons for the increase of write off from 2015
A major factor of a relative measure of a Bank’s efficiency relates to the level of NPA it maintains. If we look at the NPA percentage from 2010, we understand that up to 2014, the percentage was dwindling from 2 to 4 percentage. The CEOs of the banks were lauded for maintaining the low rate of NPAs. The auditors, management, officials from all levels helped to maintain the level of NPA low, as there was no effective counter check mechanism prevailed. In 2015, the Reserve Bank of India came out with Asset Quality Review (AQR), which suddenly put all the banks on alert. Suddenly NPAs which were put under carpet, by misclassifying as a Standard Account, instead of NPA accounts, started coming up. Once, it was no more easy to suppress the NPA status but to reveal it, the percentage and amount started escalating, reaching 11.2% in 2018. The amount of NPA touched nearly Rs.10 lakh crore in 2018. Also, the credit offtake was booming after 2010.
Figure 2
(Source: RBI data)
The loan growth started picking at a double-digit rate from 2011 to 2015. The burgeoning infrastructure would like to remind, as a pivotal lifeline of the Indian economy, was supported wholeheartedly by the bank credit, which later proved costly, as many turned NPA accounts. Most of the loans would have already run for many years, by the time it got classified as NPA. The best example would be the account of Nirav Modi, in PNB, which is stated to have started way back in 2011.
That the NPA is back to the light, so is the issue of write off. Writing off NPAs and bad loans are not discretionary for Commercial Banks, but statutory and an accounting procedure. Commercial banks in India is necessitated by this accounting requirement as instructed by the regulator RBI and no borrower is absolved from liability due to the write off of the loan in the lender’s book. It is not facilitating monopolies at the expense of those below the poverty line, as is commented on and being criticised. It is just an accounting procedure, and not a facility to a defaulter. It is high time public need to be enlightened on the facts and myths of write off.
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