NPA write-offs : private banks more aggressive than PSBs

July 5, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

NPA write-offs : private banks more aggressive than PSBs

Subject :Economy

Section: Monetary Policy

In News: Private sector banks (PVBs) have been more aggressive in writing-off bad loans than public sector banks (PSBs) as per the latest financial stability report by RBI.

Key Points:

Banks write off to rid their balance sheets of these loans and improve the impaired loans/NPA
The write-offs to gross non-performing assets (GNPAs) ratio of PVBs at 9 per cent in FY23 was much higher than 22.2 per cent of PSBs
Both categories of banks stepped up write-offs vis-a-vis preceding two years.
This difference is explained by:
- PVBs resort to technical write-offs to improve market sentiments towards their stock as the balance sheet shows reduced GNPA ratio. This is an important tool for PVBs as they raise capital in the form of equity or debt more often than PSBs.
- Strong PVBs with higher net interest margin and significant non-interest income (over 30 per cent), are able to post higher operating profit. So, they are in a position to make higher provisions than PSBs.
- By removing the assets from the balance sheet the taxable income of banks gets reduced.
- PVBs generally resort to first year write-off in case of unsecured account even in the of it becoming impaired. PSBs even with provision availability, write-off only after two years.

Concepts

Write-offs to GNPAs ratio is the ratio of write-off (including technical/prudential write-offs and compromise settlement) during a financial year to GNPA at the beginning of the year.

Technical write-off refers to cases where the NPAs remain outstanding at borrowers’ loan account level, but are derecognised by the lenders only for accounting purposes.

Meaning of Write-off

A write-off is an accounting term for the formal recognition in the financial statements that a borrower’s asset no longer has value. Usually, loans are written off when they are 100 per cent provisioned and there are no realistic prospects of recovery.
These loans are transferred to the off-balance sheet records. Write-off does not preclude the recovery of the loan. The borrower still owes money to the bank; however, the bank has de-recognised this asset from its financial statements due to uncollectibility.
Bank remains free to enforce, sell, or transfer the credit to another entity.
In case the borrower resumes servicing its debt, or the exposure is sold, a recovered amount would be directly recorded in the profit and loss (P&L) account.

Impaired vs Non performing Asset

A loan is considered to be impaired when it is probable that not all of the related principal and interest payments will be collected.
Impairment is an accounting term: the removal of the affected assets is just on the Financial Statements.
Non-performing asset is a regulatory term: Meaning its treatment will be as per the prudential regulatory framework, eg: RBI’s instruction of recognizing NPA on non-payment for 90 days.
The accounting and regulatory frameworks are distinct and there is no formal relationship between the categories introduced by the two.
In practice one would normally expect impaired assets to be also classified as non-performing, but not vice-versa.