Even as loan write-offs by scheduled commercial banks reduced by 18.2 per cent in the financial year 2023-24, over one-fifth of the banks saw an increase in the amount of the loans written-off in the year ended March.

Trends in Loan Write-Offs

• Banks with Rise in Write offs: Official data for the top ten banks in terms of the highest amount of loans written off in FY24 showed that six out of the top ten banks.
  • Punjab National Bank, Canara Bank, HDFC Bank, Bank of India, Indian Bank and Axis Bank recorded an increase in the loan write-offs during the year.
• Overall Decline in Write-Offs: Loan write-offs by scheduled commercial banks (SCBs) declined by 18.2% in FY24, amounting to ₹1.70 lakh crore, compared to ₹2.08 lakh crore in FY23.
• Five-Year Write-Off Data: Total write-offs during FY20–FY24 amounted to ₹9.90 lakh crore, showing a general decline, barring a spike in FY23.
• Gross NPAs as of March 31, 2024: ₹4.81 lakh crore, a decrease from ₹5.72 lakh crore in March 2023.
  • Top contributors in NPA are State Bank of India (₹84,276 crore) and Punjab National Bank (₹56,343 crore)
• Decline in Recovery Rates: Recovery in FY24 was at a three-year low of ₹1.23 lakh crore (-22.8% compared to FY23).
  • While overall loan write-offs and NPAs declined in FY24, recovery rates fell significantly, raising concerns about efficiency in recovering bad loans.

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About Loan Write-Off

• Loan write-off is the process of removing bad loans from the books of banks after making adequate provisions for them.
• Implication: Writing off a loan means it will no longer be counted as an asset on the bank’s balance sheet.
• Significance: By writing off loans, banks can reduce the level of non-performing assets (NPAs) on their books.
• Borrower Liability: Loan write-offs do not absolve borrowers of their repayment obligations, nor do they imply that banks stop pursuing recovery from them.
• Purpose: Loan write-offs are done to clean up the balance sheet of banks and reflect their true financial position.
• RBI Guidelines: Banks write off fully provisioned loans after four years.

About Non-Performing Assets (NPA)

• Non-performing assets (NPAs) refer to loans or advances of a bank that are in default or arrears.
• Criteria for NPA Classification: A loan is in arrears when principal or interest payments are late or missed. 
  • It becomes an NPA when the interest and/or installment of the principal remains overdue for more than 90 days.

Classification of Non-Performing Assets

• Sub-Standard Assets: Assets classified as NPAs for a period less than or equal to 12 months.
• Doubtful Assets: Assets that have been non-performing for a period exceeding 12 months.
• Loss Assets: Assets deemed uncollectible, where there is little or no hope of recovery, and require full write-off.

Asset Reconstruction Companies (ARCs) 

• ARCs are specialized financial institutions that purchase Non-Performing Assets (NPAs) from banks and financial institutions.
• Role in NPA Resolution: ARCs help banks clean up their balance sheets by acquiring bad loans and attempting to recover the funds through various strategies.
• Recovery Methods: ARCs employ strategies like restructuring loans, asset sales, legal actions, and debt recovery to maximize recovery.
• Regulation: ARCs are regulated by the Reserve Bank of India (RBI) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
    Act, 2002 (SARFAESI Act).

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Evergreening of loans 

• Evergreening of loans is a practice where banks extend new loans or additional credit to borrowers who are struggling to repay their existing debt. This is done to prevent loans from being classified as Non-Performing Assets (NPAs) or bad loans.
• While it might temporarily mask the issue, it can lead to serious problems like:
  • Hiding the true financial health of banks: It can create a false impression of the bank’s financial health.
  • Deteriorating asset quality: It can increase the risk of defaults and further damage the bank’s balance sheet.
  • Distorting financial indicators: It can lead to inaccurate financial reporting and decision-making.
• The Reserve Bank of India (RBI) has taken steps to curb this practice and promote better lending practices.

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