21-December-2024-Special-Article

LOAN WRITE-OFFS AND NPAS IN INDIAN BANKING SECTOR

Loan write-offs and Non-Performing Assets (NPAs) are critical issues in the Indian banking sector. Loan write-offs help banks clean their balance sheets and improve financial health, while NPAs represent loans where repayments have ceased.

Key Data on Loan Write-Offs

Loan Write-Offs Overview (FY2015-FY2024):

• Indian commercial banks wrote off loans worth Rs 12.3 lakh crore during FY2015-FY2024.
• Rs 9.9 lakh crore of this was written off between FY2020 and FY2024.
• The highest write-offs occurred in FY2019, amounting to Rs 2.4 lakh crore.
• FY2024 witnessed the lowest write-off in recent years at Rs 1.7 lakh crore (1% of total bank credit).

Public Sector Banks (PSBs):

• PSBs contributed 53% (Rs 6.5 lakh crore) to the total write-offs during FY2020-FY2024.

Recovery Rates:

• Recoveries from written-off loans were low, at 18.7% (Rs 1.85 lakh crore) in FY2020-FY2024.
• Over 81% (Rs 8 lakh crore) of written-off loans remain unrecovered, often involving wilful defaulters.

Impact on NPA Ratios:

• By September 2024, gross NPAs amounted to ₹3.16 lakh crore for public sector banks and ₹1.34 lakh crore for private sector banks.
• The NPA ratios were 3.01% for PSBs and 1.86% for private banks.

About NPAs

An NPA is a loan where repayment of principal or interest has been overdue for 90 days or more. For agricultural loans, NPAs are declared when repayment is overdue for two crop seasons (short-duration crops).

Types of NPAs:

• Gross NPAs: Total amount of NPAs without deducting provisions.
• Net NPAs: Gross NPAs minus provisions set aside by banks.

Key Terms:

• Wilful Defaulter: A borrower intentionally avoiding repayment of loans exceeding Rs 25 lakh.
• Large Defaulter: Borrowers with loans of Rs 1 crore or more classified as doubtful or loss assets.

Reasons for Rising NPAs

Defective Lending Practices:

• Lack of due diligence in borrower selection and monitoring.
• Funds often diverted for non-productive purposes.

Wilful Defaults:

• Rising cases of borrowers deliberately avoiding repayments.
• Promises of loan waivers undermine credit culture.

Industrial Issues:

• Poor management, outdated technology, and unstable policies lead to financial instability in industries.

Frauds and Malpractices:

• Significant rise in frauds; 36,000+ cases reported in the first half of FY2024.

Regulatory and Policy Challenges:

• Non-compliance with RBI norms and practices like evergreening of loans distort financial health.

Sector-Specific Problems:

• High costs and low profitability in sectors like aviation and MSMEs contribute to NPAs.

Challenges in NPA Recovery

• Legal and Regulatory Delays: Recovery under laws like IBC and SARFAESI often takes over 400 days.
• Asset Valuation: Difficulties in accurate valuation lead to losses during recovery.
• Debtor Resistance: Borrowers delay repayment using legal tactics or undervaluing assets.
• Operational Gaps: Poor documentation and inadequate coordination hinder effective recovery.
• Economic Factors: Economic downturns reduce asset values and complicate recoveries.

Steps Taken to Address NPAs

Bad Bank Mechanism:

• The National Asset Reconstruction Company Ltd. (NARC) resolves stressed assets, while India Debt Resolution Company Ltd. sells them in the market.

Legislative Measures:

• SARFAESI Act (2002): Enables asset seizure for loan recovery.
• Insolvency and Bankruptcy Code (2016): Speeds up insolvency resolution.
• RDB Act (1993): Facilitates debt recovery by banks.

EASE Framework:

• Launched in 2018 to enhance PSB governance, lending, and risk management.

Recommendations for Improvement

• Government Support: Implement the 4R strategy: Recognition, Resolution, Recapitalization, and Reforms.
• Better Monitoring: Use advanced systems to detect early signs of defaults and take preventive action.
• Streamlined Credit Approval: Comprehensive assessments and regular reviews of borrower profiles.
• Institutional Strengthening: Develop specialized financial institutions for industrial and infrastructure funding.
• Collaborative Efforts: Public-private collaboration to improve recovery mechanisms.
• Risk Diversification: Spread loan portfolios across sectors to minimize risks during downturns.

Conclusion

While loan write-offs help reduce NPAs temporarily, they are not a sustainable solution. Improving recovery mechanisms, enforcing stricter legal frameworks, and strengthening governance in banks are essential to address the root causes of NPAs and ensure long-term financial stability.

Mains Question:

1. Discuss the role of loan write-offs in reducing NPAs in the Indian banking sector. Analyse the challenges and long-term implications of this approach on financial stability. (150 WORDS)