Banking Central | Bank bad debt load would look scary sans huge corporate loan write-offs

Bank FDs

From an asset quality perspective, the books of Indian banks look much cleaner now compared to how they appeared half-a-decade back. Bad loans as a percentage of total loan books have fallen substantially. As per the data disclosed in the Reserve Bank of India (RBI) asset quality report, the gross non-performing assets (GPAs) of Indian lenders have declined to a seven-year low of 5 percent in September 2022.

The net non-performing assets (NNPA) dropped to a 10-year low of 1.3 percent in September. On the face of it, this is good news. Lower share of NPAs reflect positively on bank balance sheets.

But the important question is where did all the bad loans vanish? The answer lies in large-scale loan write-offs effected by banks in recent years. India's scheduled commercial banks (SCBs) wrote off Rs 10,09,511 crore during the last five financial years, according to data submitted by the government in Parliament.

The country’s largest lender State Bank of India (SBI) wrote off Rs 2 lakh crore in last five financial years, while PNB wrote off Rs 67,214 crore loans in the last four years, followed by IDBI Bank which wrote off Rs 45,650 crore of loans. Among private sector banks, ICICI Bank wrote off Rs 50,514 crore of loans, while HDFC Bank wrote off Rs 34,782 crore loans.

A write-off happens when banks lose all hopes of recovery from the asset and provides (set aside money) for it from its own books. Such loans are technically off the balance sheet, giving a fresh start to the lender to rebuild the book. But such unresolved stock of bad loans remains within the financial system; just that banks are off the burden of this toxic stock. Now, what will happen to this stock of written off loans? These are as good as gone money in most cases. Resolution of such assets is typically extremely tough.

Past evidence shows that recoveries from such loans will be very less compared with the money written off. Of the Rs 10 lakh crore loans mentioned above, public sector banks could recover only Rs 1,03045 crore from written off loans from the last five financial years, the government said citing RBI data. Now, a significant chunk of such written off loans are those given to corporate borrowers by public sector lenders. Private banks are often smart enough to shed such hopeless assets at the earliest possible opportunity.

Now, the large corporate loan defaults also include wilful defaulters. Wilful defaulters are those who have the ability to pay back but wouldn’t do so because they lack the intent. The Reserve Bank of India data, shared with Parliament on December 19, shows that the country’s top 50 "wilful defaulters" owed Rs 92,570 crore to the Indian banks as of March 31, 2022. Banks are sitting ducks for cronies and crooks.

In most cases, banks haven’t made meaningful progress in the recovery from deep-pocketed and well-connected promoters. At the end of a long legal process, the value of underlying assets deteriorates, and banks are left empty-handed. The government’s intervention to speed up the recovery process is equally critical since each penny it feeds to state-run banks from the exchequer is public money.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)