During debate in the last session of parliament, Sitaram Yechury [CPM] and other members alleged that while, the government had no qualms in waiving loans worth hundreds of thousand crores given to industrialists/corporate, it showed little inclination to extend the same relief to farmers who are unable to pay back loans for no fault of theirs [courtesy, drought/poor rainfall or untimely rains].
The treasury benches responded saying loans given to corporate are not waived; instead they are written-off. To a layman, write-off and waiver would appear to convey the same meaning i.e. in both, lender decides not to recover the amount from the borrower. Yet, Reserve Bank of India [RBI] and finance ministry would want us to believe that write-off is an entirely different cup of tea!
Whether it is a loan given to body corporate or farmer, waiver is totally unacceptable as it impacts viability of banks resulting in erosion of their capital base. The union government has been pumping thousands of crores [e.g. during 4 year period 2015-16 to 2018-19, it has committed Rs 70,000 crores to public sector banks] to prevent this erosion. It uses tax payers’ money to fund the recapitalization.
Considering the serious ramifications, it is necessary to carefully scrutinize the stance/interpretation of RBI/finance ministry. The official position as articulated by RBI by way of a clarification to a media report, based on an RTI reply in February 2016 is:-
“Writing off of non-performing assets (NPAs) is a regular exercise conducted by banks to clean up their balance sheets. A substantial portion of this write-off is, however, technical in nature. It is primarily aimed at cleansing the balance sheet and achieving taxation efficiency. In ‘technically written off’ accounts, loans are written off from the books at the head office, without foregoing the right to recovery. Further, write-offs are ‘generally’ carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks”.
The crux of regulator’s argument rests on the premise that in ‘technically written off’ accounts, banks retain the right to recover the money. Where is the impulse/propulsion to recover when the bank has already made provisions [albeit accumulated] for such loans?
The right to recover is meaningless unless it is actually exercised. The bottom line is that banks should exercise it leading to recovery of the money. But, herein by making provision for bad loans [and cleansing the balance sheet], on its own volition, it is forfeiting the right to recover. In this backdrop, any assertion that ‘bank has the right to recover’ is a mere rhetoric meant for public consumption. This very logical interpretation is not just theoretical but is very real and corroborated by available evidence on ground.
During the five-year period ended March 2016, all scheduled commercial banks [SCBs] cumulatively wrote off over Rs 2,25,000 crore [including compromise]. SCBs include all public sector banks, private sector banks, foreign banks, regional rural banks [RRBs] and some co-operative banks. These represent over 95% of the formal credit given out by all financial institutions in the country.
The loans written off in individual years were 2011-12:Rs 21,000 crores; 2012-13:Rs 33,000 crores; 2013-14:Rs 42,000 crores; 2014-15:Rs 59,000 crores and 2015-16:Rs 70,000 crores. This was also the period when NPAs rose at a brisk pace viz 2011-12: Rs 137,000 crores; 2012-13:Rs 184,000 crores; 2013-14:Rs 251,000 crores; 2014-15:Rs 309,000 crores and 2015-16:Rs 566,000 crores.
The write-offs account for 11-16% of NPAs in each of those years. But for these – at a progressively higher rate in each succeeding year – the NPA scenario would have been much worse. No wonder, write-off has been resorted to make bad loan situation look less scary.
How much follow up did the banks do in exercise of their right to recover? During 2014-15, banks recovered only about Rs 7000 crores or 12% of written-off accounts in that year. During FY 2015-16, the recovery was over Rs 9500 crores or 14% of written-off accounts. Though the amount from recovered loans in FY15 and FY16 might not pertain to that financial year alone, the numbers show the actual recovery to be only a tiny fraction of the total amount written-off and also to be a long protracted process.
If, a loan [albeit a substantial portion] is not recovered in initial few years of its write-off, with the passage of time, there will be even lesser interest by banks [if at all, there is some] in pursuing recovery and hence, negligible possibility of getting it back. Hence, it is as bad as amount waived; the nomenclature “write-off” is just a jargon to camouflage the real position.
The problem of high NPAs and concomitant significant write-offs [backed up by provisioning] to make it look less scary owes a lot to indiscriminate lending especially since 2011 to large corporate – in several cases without conducting due diligence. Several cases of ‘siphoning off’ borrowed funds to personal accounts and even shell companies have come to limelight.
Now, if such bad loans are waived/exonerated [even as indebted farmers continue to suffer for no fault of theirs], this is bound to cause a lot of heart-burn. The government/RBI should take a serious note and take steps to nip the problem in the bud. It should shun the practice of write-offs and provisioning for bad debts. It makes no sense to bolt the stable when horses have already fled.
True, NPAs remaining on the balance sheet of banks is bad omen and has serious implications for their financial health, market perception/capitalization etc, so be it. This is precisely what is needed to keep them on tenterhooks so that they make continuous efforts to chase the borrowers and recover. The focus should not be on cleaning the books per se, it has to be on ‘right’ and ‘timely’ actions.
Even so, under the amended Banking Regulation Act [BRA], RBI has powers to order action against loan defaulters and defaulting companies under the Bankruptcy Code under which bank need not even have to wait for 90 days of default – otherwise required for a loan to be termed as NPA. This should be fully leveraged to get desired results.