Indian banks have written off a combined Rs 1.53 lakh crore worth loans in financial year2021, nearly six per cent up, compared with the previous year, a Moneycontrol analysis of the numbers published by individual banks showed on 9 June. In FY20, banks had written off Rs 1.45 lakh crore worth loans.
A loan write off happens when the bank deems nil chances of recovering the money from the borrower. Doing so, the lender will have to make full provisioning (set aside money), to cover likely losses. Majority of such loans are loans given by banks to corporates.
The write of numbers include both regular and technical write-offs by banks. Lenders typically write off loans against which they are carrying full provisions in order to reduce the size of their bad loan books.
“Write-offs are all done for 100 percent provided accounts. It’s a common management tool. Having 90 percent PCR (provision coverage ratio)and not getting any return (makes no sense),” AK Das, MD & CEO, Bank of India, said on 4 June after the bank declared its financial results for the March quarter.
“At least here we are getting a reduction and the recovery action continues there,” Das added.
At the same time, a high amount of write-offs also means that banks’ non-performing asset (NPA) books would have actually been larger by an equivalent amount. An NPA is a loan account where repayments have been overdue for over 90 days.Among the banks which saw the sharpest surge in write-offs was Yes Bank, where the amount of write-offs stood at Rs 17,208 crore in FY21, as against Rs 6,358 crore in FY20. State-owned Central Bank of India also saw write-offs rising 44 percent year-on-year to Rs 5,992 crore in FY21.
State Bank of India’s (SBI) write-offs rose 40 percent to Rs 17,590 crore for the year.
Some banks, such as Punjab & Sind Bank and Karur Vysya Bank, also managed to reduce their write-offs on a y-o-y basis. Punjab & Sind Bank’s write-offs dropped 96 percent to Rs 70.57 crore, while those of Karur Vysya Bank fell 67 percent to Rs 228 crore.
In a report dated 26 May CARE Ratings analysts Sanjay Agarwal and Saurabh Bhalerao wrote that the gross NPA ratio of banks has been on a downward trajectory since the last two years, led by factors that include recoveries, higher write-offs and one-time restructuring schemes announced by the Reserve Bank of India (RBI).
“...it should be noted that write-offs have accounted for quite a large share of the same. In the earlier years, write-offs had a smaller share, but post FY18, the share has markedly increased indicating that banks have cleaned their books taking a hit and recoveries have had a smaller share of the same,” CARE Ratings said in the report.
As a result, despite an overall trend of a decline in NPA numbers for the banking system, analysts are wary about the actual level of stress in the system. The emergence of a second wave of the pandemic in April and May has only made matters worse.
On May 5, Kotak Institutional Equities said in a report that estimating credit costs is a challenge, given the uncertainty on the pace and breadth of economic recovery. “We note the credit costs (of banks) are still quite high and the revisions to earnings had still not reflected the return-to-normalcy commentary that we were getting from the management since 2HFY21,” the broking firm said in the report.
Banks anticipate a rise in stress in the retail and micro, small and medium enterprises (MSME) segment. Bank of Baroda MD & CEO Sanjiv Chadha told Moneycontrol in a recent interview that there is an impact on the two segments, but it will be possible to address that impact with the RBI’s restructuring scheme.Analysts expect that measures like the extension of the credit guarantee scheme for MSMEs and the restructuring scheme could delay bad loan recognition further. The latest iteration of the credit guarantee scheme allows banks to extend the period of repayment of loans disbursed under its first phase by another 12 months and further disburse additional 10 percent of loans, if required. “We believe this would delay recognition and see regional private banks as key beneficiaries. However, the impact of these schemes has beenlower-than-expected,” Kotak Institutional Equities wrote in a separate note dated May 31.