Every few months, a Parliament question or an RTI query forces the Finance Ministry or Reserve Bank of India (RBI) to share an update on the quantum of loans written off by banks. This gives rise to an uproar in Parliament. But the issue is soon forgotten after the Opposition has made the necessary noises and the government has shared a templated response about write-offs not equating to loan waivers or loss of taxpayer money. The script played out this week again, after the government told Parliament that banks have written off about ₹10.6-lakh crore worth of loans in the last five years.
It is about time that the RBI ended this piecemeal data-sharing and mandated that banks make more granular disclosures of their loan write-offs by category and recoveries in each accounting period. RBI can then share the aggregated picture and correlate write-offs to outstanding loans and non-performing assets. This will permit more meaningful analysis. Outrage over aggregated write-offs of ₹10.6-lakh crore is misplaced on several counts. Loans written off by a bank in any given year typically originate from a stock of doubtful loans built up over a long period. RBI regulations require banks to initiate bad loan provisions at 15-25 per cent of value as soon as a loan is 90 days overdue, with doubtful loans being fully provided for in 4-5 years. These loans are then written off at the bank’s discretion. Therefore, cumulative figures do not tell you much about direction in which write-offs are trending.
To assess whether there are excessive write-offs, they need to be correlated with outstanding loans or reported NPAs. For instance, data (compiled from Parliament and RTI queries) suggest that banks have written off between ₹1-lakh crore and ₹2.3-lakh crore annually in the last seven years. Write-offs have hovered at between 1.5 per cent and 2.75 per cent of outstanding non-food credit, not an alarming number. But the question worth asking is why write-offs shot up from 1 per cent in FY15 and FY16 to 2.75 per cent in FY19 before abating to 1.6 per cent in FY22. If RBI’s new dispensation on stressed assets in 2019 aided the fall, why is there a renewed uptick to 1.76 per cent in FY23? Also of concern is the rising share of large corporate borrowers in written-off loans, from 30 per cent in FY15 to over 50 per cent in FY23. This is despite the advent of Insolvency and Bankruptcy Code and the Central Repository of Information on Large Borrowers.
It is disingenuous to claim that loan write-offs are a mere accounting formality. It is a known fact that domestic banks recover less than a fifth of loans written off in their books. Loan losses have implications for multiple stakeholders in banks – from public shareholders to taxpayers. They have a right to better disclosures.