Public sector banks (PSBs) are expected to step up one-time settlement (OTS) in written-off loans as the Finance Ministry and the Reserve Bank of India have emphasised on the importance of improving recovery from these accounts.

Since legal action can be drawn out, the state-owned lenders are seen actively pursuing OTS to meet the Finance Ministry-set target of making about 40 per cent recovery from written-off loan accounts. 

PSBs could recover only 14 per cent (or ₹1.03-lakh crore) from written-off loans aggregating ₹7.34-lakh crore in the last five years ended March 2022.

Legal channels

Banks can initiate legal recovery proceedings against delinquent borrowers via four channels – the National Company Law Tribunal, the Debt Recovery Tribunal, SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002, and Lok Adalats.

“To get to the recovery target of 40 per cent, we will have to do more OTS. There is no other way. The legal channel will take its own time.

“Many banks have framed separate policies, including OTS, for written-off accounts. So, that will improve the recovery position in these accounts,” said a senior public sector bank official.

Since written-off loans are generally devoid of secured assets, asset reconstruction companies (ARCs) may not be interested in buying such loans. Even if ARCs want buy, the recovery rate may be so low that banks may not be interested.

In May 2023, the Finance Ministry had asked state-owned lenders to increase recovery from written-off accounts to about 40 per cent.

More recently, Reserve Bank of India Governor Shaktikanta Das had impressed upon Bank chiefs the need for improving recovery from written-off accounts.

Banks can remove non-performing loans, including those in respect of which full provisioning has been made, on completion of four years from their balance-sheet by way of write-off to improve the key metric relating to asset quality – gross non-performing assets ratio.