Loan Write-Offs Soar, Recovery Sinks: India's Banking Sector Grapples with Bad Debt Crisis

In a recent revelation by the Reserve Bank of India (RBI), it has come to light that Indian banks have written off bad loans worth over Rs 2.09 lakh crore (approximately $25.50 billion) during the fiscal year ending in March 2023. This massive loan write-off has contributed to a significant reduction in gross non-performing assets (GNPA), bringing it to a 10-year low of 3.9 per cent of advances in March 2023. However, an alarming fact that has surfaced is the banks' dismal recovery rate of just 18.60 per cent on the loans written off in the past three years.

Banks' Massive Loan Write-Offs and GNPA Reduction

Over the last five years, the banking sector has written off an astounding Rs 10.57 lakh crore in bad loans. This figure increases substantially to Rs 15.31 lakh crore since the fiscal year 2012-13. These write-offs have been instrumental in bringing down the GNPA from Rs 1021 lakh crore in FY2018 to Rs 5.55 lakh crore by March 2023.

A Troubling Recovery Rate and Impact on NPA Ratios

While the significant loan write-offs have improved the banks' balance sheets, it has raised concerns over their ability to recover the loans. According to the RBI's Right to Information (RTI) reply, banks have only managed to recover Rs 1.09 lakh crore out of the Rs 5.87 lakh crore loans written off in the last three years. This staggering statistic reveals that banks could recover only 18.60 per cent of the total write-offs during this period.

Considering the recoveries from write-offs, the total defaulted loans (excluding the recovered amounts) amount to Rs 10.32 lakh crore. Factoring in the write-offs, the total Non-Performing Assets (NPA) ratio would have been 7.47 per cent of advances, significantly higher than the reported 3.9 per cent by the banks.

Escalating Write-Offs and Abysmal Recoveries

The data from the RTI reply indicates a concerning trend of rising write-offs over the years. In FY2023, banks wrote off Rs 2.09 lakh crore, compared to Rs 1.74 lakh crore in March 2022 and Rs 2.03 lakh crore in March 2021. Unfortunately, the recoveries from these written-off loans have been abysmal. In FY21, banks recovered only Rs 30,104 crore, which increased slightly to Rs 33,534 crore in FY22 and Rs 45,548 crore in FY23.

The Mechanism of Loan Write-Offs

When a bank writes off a loan, it removes it from its asset book after the borrower has defaulted, and the chances of recovery are deemed very low. However, banks are still expected to continue their efforts to recover the loan using various means, and they must make provisions for these written-off loans. The write-off also affects the bank's tax liability, as the written-off amount is deducted from the profit.

Public sector banks have reported the largest share of write-offs, accounting for nearly 62.45 per cent of the total write-off exercise in the last three years. These banks wrote off an astounding Rs 3.66 lakh crore of bad loans, reflecting the severity of the dire debt crisis.

The RBI's Take on Write-Offs

According to the RBI, a substantial portion of write-offs is technical, primarily intended to cleanse the banks' balance sheets and achieve taxation efficiency. These write-offs are generally offset against accumulated provisions made for such loans. Once the recovered amount is received, the provisions flow back into the banks' profit and loss account.

The alarming statistics revealed by the RBI's RTI reply show the magnitude of the bad loan crisis in India and the challenges banks face in recovering defaulted loans. While the massive loan write-offs have helped in reducing GNPA levels, the poor recovery rate raises questions about the efficacy of banks' efforts in reclaiming the written-off loans. Moving forward, it becomes imperative for banks to adopt more robust strategies to tackle bad loans and strengthen their recovery mechanisms to ensure a healthier and more stable banking sector.