Page 35 - Banking Finance June 2023

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to recover the money themselves or sell the loan to a reported a decline in gross NPAs to Rs 7, 29,388 crore, or
recovery company. The asset has been written off from a 5.9 per cent of the total advances as of March 2022. Gross
creditor's book but not from its memory. The borrower NPAs were 11.2 per cent in 2017-18.Public sector banks
continue to owe the money of the Bank.Once a loan is reported the maximum share of write-offs at Rs 734,738
written off by a bank, it goes out from the asset book of the crore accounting for nearly 73 per cent of the exercise.
bank. The bank writes off a loan after the borrower has
defaulted on the loan repayment and there is a very low
Consequences of Write-off
chance of recovery. The lender then moves the defaulted
Government loses tax revenues as the losses are set-off
loan, or NPA, out of the assets side and reports the amount
against tax. Banks makes provisioning out of their profit. At
as loss.
the time of write off of NPA, either they use their
provisioning (if 100% provided for) or profit. In both the
The writing off NPAs is a regular exercise carried by banks
cases, Banks reduce their profit and in turn pay less tax to
to clean up the balance sheet.It is primarily intended at
government. As per one estimate the huge write-off in last
cleansing the balance sheet and achieving taxation
five years would have been enough to wipe out 61 per cent
efficiency.In Technically Written Off accounts: loans are
of India's estimated gross fiscal deficit of Rs 16.61 lakh crore
written off from the books at the Head Office, without
for 2022-23.
foregoing the right to recovery.Write-offs are generally
carried out against accumulated provisions made for such
Not only the government but customers too faces the
loans.Once recovered, the provisions made for those loans
consequences. Banks that have a high level of non-
flow back into the profit and loss account of banks.
performing asset tend to have low deposit rates and keep
Mainly two advantages a bank have in writing off loan. One, lending rates high in order to recover the losses on these
it gives a true and fair picture of the 'assets' that are making assets.
money. After all,there is no point in having a huge asset base
that doesn't give any returns. And two, by writing off the Government, despite of losing tax
loan the bank gets a tax break on the losses incurred.
revenue, why does it, along with the
Why do banks write off loans? central bank, encouragewrite-offs?
Most of the public sector banks were inflating their asset
After a loan turns bad, a bank writes it off when chances
base by continuing to show the defaulting accounts as
of recovery are remote.
normal, and not lending money to others who needed it.
It helps the bank reduce not only its NPAs but also taxes
Before writing off the toxic assets, recapitalisation of banks
since the written off amount is allowed to be deducted
would not have been of much use as banks would have used
from the profit before tax.
this money to hide their losses. In order to encourage lending
After write-off, banks are supposed to continue their and kick starting theeconomy, banks are now being
efforts to recover the loan using various options. They
encouraged, rather forced, by the government and central
have to make provisioning also. Bank to clean up their balance sheets and start afresh.
Contemporary Write-off exercise by PSU Conclusion:
Banks: Non-Performing Assets are both a political and financial
According to data furnished by the Reserve Bank of India issue. Bad loans are a huge problem for Indian banks as it
(RBI), the mega write-off exercise has enabled banks to directly impacts their profitability. Other sectors are also
reduce their non-performing assets (NPAs) or defaulted loans affected because of the failure of banks. Therefore, banks
by Rs 10,09,510 crore ($123.86 billion) in the last five and financial institutions must take the necessary steps to
years.But, banks have been able to recover only 13 percent tackle the NPA issue. They must ensure fair and effective
of it so far. This huge write-off would have been enough to retrieval of loans which enables the smooth functioning of
wipe out 61 per cent of India's estimated gross fiscal deficit the banking sector. The banks must be active in adopting
of Rs 16.61 lakh crore for 2022-23.The banking sector policies that help prevent NPAs.

32 | 2023 | JUNE | BANKING FINANCE