Loan waivers and written-offs given to corporates or farmers are totally unacceptable. They impact viability of banks and erode their capital base
In the last session of the Parliament, members of the Opposition alleged that, while the Government had no qualms in waiving loans worth hundreds of thousand crore rupees given to industrialists and corporates, it showed little inclination to extend the same relief to farmers who are unable to pay back loans for no fault of theirs. The treasury benches responded by saying loans given to corporates are not waived; instead, they are written-off. To a layman, write-off and waiver would appear to convey the same meaning — in both, lender decides not to recover unpaid loans from borrower. Yet, the Reserve Bank of India (RBI) and Union Ministry of Finance would want us to believe that write-off is an entirely different cup of tea!
Whether, it is a loan given to a corporate or a 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 of rupees — during the four year period 2015-19, it has committed Rs 70,000 crore to public sector banks to prevent this erosion, using tax payers’ money to fund recapitalisation.
Considering the serious ramifications, it is necessary to carefully scrutinise the stance of the RBI and the Union Ministry of Finance. The official position as articulated by the RBI by way of a clarification to a media report, based on a Right to Information (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 the 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 to recover when the bank has already made provisions 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, by making provision for bad loans and cleansing the balance sheet, on its own volition, they are 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. Indeed, this is corroborated by available evidence.
During the five-year period ended on March 2016, all scheduled commercial banks (SCBs) — representing over 95 per cent of the formal credit given out by all financial institutions — cumulatively wrote off over Rs 2,25,000 crore (including compromise). The loans written off in individual years — in 2011-12, Rs 21,000 crore; in 2012-13, Rs 33,000 crore; in 2013-14, Rs 42,000 crore; in 2014-15, Rs 59,000 crore and in 2015-16, Rs 70,000 crore. This was also the period when NPAs rose at a brisk pace — in 2011-12, Rs 1,37,000 crore; in 2012-13, Rs 1,84,000 crore; in 2013-14, Rs 251,000 crore; in 2014-15, Rs 309,000 crore and in 2015-16, Rs 5,66,000 crore. The write-offs accounted for 11-16 per cent of NPAs in each of those years. But, for this the NPAs scenario would have been much worse.
How much follow up did the banks do in order to exercise their right to recover? During 2014-15, banks recovered only about Rs 7,000 crore or 12 per cent of written-off accounts in that year. During fiscal year (FY) 2015-16, the recovery was over Rs 9,500 crore or 14 per cent 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 is not recovered in initial few years of its write-off, there will be even lesser interest by banks 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) is to make it look less scary; owes a lot to indiscriminate lending especially since 2011 to large corporates — 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.
If, such bad loans to corporates are exonerated, this is bound to cause a lot of heart-burn all the more when similar dispensation is not considered for farmers. The Government should 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, does not bode well for banks and has serious implications for their financial health and market capitalisation; 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 books per se, instead, it has to be on right and timely actions.
Under the amended Banking Regulation Act (BRA), the RBI has powers to order action against loan defaulters under Insolvency and Bankruptcy Code, 2016. For initiating action under the code, 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 leveraged to get back all bad loans (including those written-off) and prevent fresh slippages.
(The writer has a PhD in economics from JNU, Delhi)
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