Public Sector Banks Write Off Rs 55,356 Crore In First Six Months Of Financial Year 2017-2018 In A Move To Clean Balance Sheet
December 5th, 2017
In a move to clean their balance sheet, the public sector banks (PSB) have resorted to write-off loan worth Rs 55,356 crore in the first six months of the fiscal year 2017-18, according to a data compiled by Investment Information and Credit Rating Agency Ltd (ICRA), said a report by The Indian Express. This comes after a string of defaults by firms and promoters in the wake of the economic slowdown.
The write-off in the last six months – 54% higher than the Rs 35,985 crore written off in the same period last year – comes at a time when the banks are struggling to resolve many cases of repayment of loans and recover the money stuck with corporate and defaulters in insolvency proceedings. Given the trend, bankers expect, total write-off would be nearly Rs 1 lakh crore by the end of Financial Year (FY) 18.
Write-offs over the past one decade
Figures which were obtained by the aforementioned publication from the Reserve Bank of Indian through the Right To Information (RTI) Act for the last decade show that banks have written-off Rs 2,28,253 crore in nine years. This time period begins from FY 2007-08 to FY 2015-16. The RBI did not provide any data for the subsequent period. The ICRA while responding to a questionnaire by The Indian Express said that write-offs amounted to Rs 1,32,659 crore in 2016-17 and the first six months of 2017-18. This brings to the total amount of write-offs in the last ten years to Rs 3,60,000 crore.
PSU banks have written off Rs 25,573 crore in the June quarter and Rs 29,783 crore in the September quarter. The ICRA said this is the highest written off amount in any quarter. Banks were engaged in a massive write-off of loans over the years and then the figures hit a high of Rs 77,123 crore during the year ended March 2017. This comes against Rs 57,585 crore in fiscal 2015-16.
What is writing-off of loans?
The RBI also clarified in an explanatory note, that writing off of non-performing assets or bad loans is a regular exercise carried out by the banks to clean up their balance sheets. A substantial portion of the write-off is technical in nature. It is primarily intended for cleansing the balance sheet and achieving taxation efficiency.
The RBI further says that in “Technically Written Off” accounts, loans are written off from the books at the Head Office, without foregoing the right to recovery. Also, write-offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for these loans flow back into the profit and loss accounts of banks.
This, however, does not waiver off the bank’s right to collect it. The lender still can chase the borrower for repayment of the debt. M Narendra former chairman and MD of Indian Overseas Bank, said “The write-offs is just a technical book entry. Banks are not losing anything. It doesn’t mean banks are giving up those assets. They will continue with various recovery methods.” A write-off is done when the loan becomes irrecoverable. The loan is the excluded from the balance sheet and taxable income of banks gets reduced.
Is writing-off a good measure?
Some experts, however, have the perception that write-offs are not transparent and that public funds are misused through such activities, “You can’t clean up the balance sheet for the last 20 years. You can’t clean it up every year. Generally, write-offs should be small and must be used sparingly when there is some crisis. Technical write-offs creates non-transparency, destroys the credit risk management system and brings all types of wrongdoings in the system,” said an RBI official.
The official also said that write-offs should be done within the policy, with all efforts taken to recover the money. Any asset which is backed up by a tangible asset is never written off. “Secondly, you must be subject to scrutiny for these write-offs. There must be a policy. Use it very sparingly whenever it is absolutely essential. If there is an asset, why are you writing it off?”
Karthik Srinivasan, group head – financial sector ratings, ICRA said, “With limited resolution in stressed assets and consequent ageing of these stressed loans, the loan write-offs by public sector banks during Q2 of FY 18 were at the highest-ever levels. With record loan write-offs, the addition to gross NPAs of public sector banks was limited to Rs 837 crore only during the Q2 of fiscal 2018, the lowest level during the last four years.”
State of NPA of Public Sector Banks
Gross NPAs of these banks, which stood at Rs 2.94 lakh crore in March 2015, increased to Rs 5.69 crore in March 2016 and further to Rs 6.49 crore in September 2016, have surged higher to Rs 8.38 lakh crore, said a report by Zee Business. PSB’s NPA ratio has been range-bound for two quarters at a specified level. It then has increased to a new one which is between 10-11% in June/September 2016 before crossing to 11-12% in the next to two quarters and then 12-13% in the subsequent periods.
Under the new bankruptcy code, a total exposure of Rs 3,00,000 crore of accounts is likely to be resolved. The overall credit provisioning is likely to be at Rs 2,40,000 crore to Rs 2,60,000 crore including an impact of ageing on existing NPAs for FY2018 as against Rs 2,00,000 crore during FY 2017.
Read more at The Indian Express