While delivering a lecture at Tokyo last week, Reserve Bank of India Governor Shaktikanta Das said balance sheets of the Indian banks are their healthiest in a long time and elaborated on the steps taken by the regulator and the government to strengthen the lenders and the broader economy as a whole.
Das has a valid point. The Indian banks are in a much better shape than they were a few years ago in terms of asset quality. In the post-pandemic phase as well, the RBI’s swift response to mitigate the global impact worked well to alleviate the concerns regarding a potential spike in bad loans. However, the primary reason why the banks are now showing a lower quantum of bad loans is the large-scale write-offs in the last one decade or so.
Particularly after the RBI introduced the framework for early identification of stressed assets and implemented the asset quality (AQR) review process under former governor Raghuram Rajan in 2015, the banks were forced to declare all bad loans and make provisions. As a result, the Gross NPAs of banks surged from about Rs 2 lakh crore all the way to around Rs 9 lakh crore in three to four years.
What followed was substantial write-offs of loans. In the next five financial years till 2022-23, Indian banks wrote off over Rs 10 lakh crore of unpaid
loans. In 2022-23 alone, banks wrote off Rs 2 lakh crore worth of loans, according to an RTI reply by Indian Express newspaper.
Following this huge write-off, the gross NPAs of the banks nearly halved between 2018 and 2023. According to the RBI, banks have written off Rs 15,31,453 crore since FY2012-13. Including write-offs, the total NPA ratio would have become 7.47 percent of advances as against 3.9 percent reported by the banks, a report said.
So, one could argue that one of the main reasons why the banks now have a cleaner book is substantial loan write-offs carried out over the last decade or so. A loan write-off happens when banks fail to recover the money through usual channels. These loans need to be fully provided (money set aside to cover potential losses). A loan that is written off is moved from the books of banks, and hence the books look much cleaner (lower NPA levels). But the fact is that these loans remain in the financial system and remains a worry till the time it gets resolved.
A technical write-off still means banks can recover money they can. But data suggests that such recovery is typically only a small fraction of the total money at stake - around 18-20 percent of the total. In March this year, Moneycontrol reported that the scheduled commercial banks (SCBs) recovered Rs 33, 534 crore in the financial year 2021-22 from loans that were earlier written off citing the Ministry of Finance data.
The bottom line here is that it is important to understand the actual reason for the fall in banks’ bad loans in the recent years. Of course, the improvement in the overall economic situation helped to some extent but Indian banks must mainly thank the loan write-off process for their cleaner books.
Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.
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