According to Finance Ministry data, public sector banks (PSBs) wrote off a record Rs 81,683 crore worth of bad loans in the financial year ended March 2017,
This represents a 41% jump over the previous year’s write-off amount of Rs 57,586 crore and has happened despite several measures (explained below) put in place to tackle the bad loans or non-performing assets (NPAs) crisis.
With the increase in the amount of loans written off in the past five years, their combined profitability has been steadily deteriorating. According to The Indian Express, in contrast to the write off amount of Rs 27,231 crore in 2012-13 (when banks earned combined net profit of Rs 45,849 crore) the amount of loans written off in 2016-17 trebled to Rs 81,683 crore and the banks combined profits were a Rs 474 crore.
Banks have written off a total of Rs 2.46 lakh crore worth of loans in the last five years, Finance Ministry data show.
In a write-off, the bank includes bad debts as an uncollectible loss on its tax return. The write-off is also called a ‘charge-off’. The write-off reduces the bank’s earnings and thereby reduces its taxable income. This accounting procedure may reduce the bank’s overall tax liability, which is the goal of a write-off. The designation of the debt as uncollectible doesn’t mean the bank will never collect on it until that point.
India’s bad loans problem
In the last three years, the RBI has been struggling to resolve its bad loan problem. In May 2016, former RBI Governor Raghuram Rajan initiated the Asset Quality Review (AQR) through which the RBI had asked the banks to report stressed loans or even non-performing ones (more details here).
Some of the findings of the AQR were:
- A watchlist of potentially bad loans were unearthed.
- Raghuram Rajan confessed that the earnings of state-run banks do not look “pretty”.
- The findings of the AQR caused the public sector banks market capitalisation to drop due to the poor numbers.
- The RBI also asked banks to clear their balance sheets by 2017.
A few weeks ago, it was revealed that only 12 accounts are responsible for about 25% of these bad loans. The gross bad debt that plagues India’s banking system as of March 2017 was at Rs 7.11 lakh crore, according to Business Standard. This means that the 12 accounts would be responsible for about Rs 1.78 lakh crore.
RBI granted more powers to tackle bad loans
On 3 May, the Cabinet amended the Banking Regulation Act, 1949 to address India’s problem with bad loans and nonperforming assets (NPAs). The Cabinet’s amendment put in place a scheme to resolve stressed assets in the banking system by giving the RBI a broad range of powers to tackle bad loans (more here).
At its first meeting, the IAC panel – which is mainly comprised of the RBI’s independent board members – discussed the top 500 stressed accounts of the banking system that could be referred for resolution under the Insolvency and Bankruptcy Code (IBC).
“The Reserve Bank, based on the recommendations of the IAC, will accordingly be issuing directions to banks to file for insolvency proceedings under the IBC in respect of the identified accounts. Such cases will be accorded priority by the National Company Law Tribunal (NCLT),” Livemint quoted the central bank as saying.
The NCLT is the arbitration authority for cases filed under the IBC. So far, over 80 cases of bad loans have been referred to NCLT, Finance Minister Arun Jaitley said on Monday, 12 June, after meeting bank chiefs. About 18 were referred for bankruptcy by their creditors.
For those accounts that don’t meet the criteria set by the advisory panel, the IAC suggested that banks should finalise a resolution plan within six months. In cases where a viable plan is not agreed within six months, banks have to file for insolvency proceedings.