Loan Write-Offs and NPA Reduction in PSBs

A large-scale loan write-off by banks over the past few years has contributed to a significant reduction in non-performing assets (NPAs). As a result, banks have achieved a 12-year low NPA ratio of 2.8% of advances by March 2024.

What is the Key Data Regarding Loan Write-Offs by Banks?

Loan Write-Offs:

Between FY2015 and FY2024, Indian commercial banks wrote off loans amounting to Rs 12.3 lakh crore, with Rs 9.9 lakh crore in the last 5 years alone (FY 2020-2024).

The peak in loan write-offs occurred in FY2019 at Rs 2.4 lakh crore, following an asset quality review initiated in 2015.

However, write-offs have decreased since then, with FY2024 recording the lowest at Rs 1.7 lakh crore, amounting to just 1% of the total bank credit.

Public Sector Banks Share:

Public sector banks (PSBs) accounted for 53% (Rs 6.5 lakh crore) of the total loan write-offs in the last 5 years (FY 2020-2024).

Recovery Rates:

Despite loan write-offs, the recoveries from these write-offs have been relatively low, standing at only 18.7% (Rs 1.85 lakh crore) in the last 5 years (FY 2020-2024).

Over 81% of the written-off amount (over Rs 8 lakh crore) remained unrecovered between FY 2020-2024, indicating challenges in recovering defaulted loans.

These loan accounts were mostly wilful defaults with promoters and directors of some of the companies even fleeing the country.

Impact on NPA Ratios:

As of September 2024, the gross NPAs of PSBs and private sector banks (PSBs) stood at Rs 3.16 lakh crore and Rs 1.34 lakh crore, respectively.

The NPA ratio as a percentage of outstanding loans was 3.01% for PSBs and 1.86% for private sector banks.

Note:

A wilful defaulter is a borrower or guarantor who has intentionally failed to repay a loan, with an outstanding amount of Rs 25 lakh or more.

A large defaulter refers to a borrower with an outstanding loan balance of Rs 1 crore or more, whose account has been classified as doubtful or a loss.

Write-offs refer to the removal of a non-performing loan or asset from a bank’s financial records, recognizing that the debt is unlikely to be recovered.

This process does not relieve the borrower of the responsibility to repay the debt but acknowledges the improbability of recovery.

What is a Non-Performing Asset (NPA)?

It refers to loans or advances issued by banks or financial institutions that no longer bring in money for the lender since the borrower has failed to make payments on the principal and interest of the loan for at least 90 days.

For agricultural loans, a loan granted for short-duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons.

Types of NPAs:

Gross NPA: This is the total amount of NPAs without deducting the provisional amount.

Net NPA: This is the gross NPA minus the provision.

The provision refers to funds left aside by banks to cover potential losses arising from bad loans or NPAs.

Bad Bank:

The National Asset Reconstruction Company Ltd (NARC) is India’s designated “bad bank.”

To facilitate the sale of these assets, the government has also established the India Debt Resolution Company Ltd (IDRC), which works to sell the assets in the market.