Write-off

Write-off

Subject : Economy

Scheduled commercial banks have recovered just 13 per cent of the total write-off in the last five years.

Details:

Due to government reforms the gross NPA ratio of the SCB has declined to 5.9 per cent as on March 31, 2022.

Concept:

Write-off

• It refers to taking out a loan from the book of account.
• NPAs (non-performing assets), including those with full provisioning made on completion of four years, are removed from the balance-sheet of the bank as write-off. 
• Banks write off NPAs to clean up their balance-sheet, get tax benefit and optimize capital, in accordance with RBI guidelines and policy approved by their boards.
• A write-off does not mean relief to the borrower as borrowers of written-off loans continue to be liable for repayment and the process of recovery continues; the write-off does not benefit the borrower.
• Banks continue to pursue recovery actions initiated in written-off accounts through various recovery mechanisms available.
• Recovery mechanisms include:
  • filing suit in civil courts or in debt recovery tribunals;
  • action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
  • filing of cases in the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016;
  • through negotiated settlement/compromise;
  • through the sale of NPAs.

Stressed assets

• Assets of the banking system comprises loans given and investment (in bonds) made by banks. Quality of the asset indicates how much of the loans taken by the borrowers are repaid in the form of interests and principal.
• Bad assets are further classified into NPA, substandard assets, doubtful assets, and loss assets etc..
• Stressed assets are a sum of Non-performing assets, restructured loans, and written-off assets. During the period of 90 days before becoming non-performing assets, these are called ‘stressed assets.’
  • NPAs (Non-performing Assets) – A loan whose interest/instalments has not been paid for more than 90 days.
    • A substandard asset is an asset classified as an NPA for less than 12 months.
    • A doubtful asset is an asset that has been non performing for more than 12 months.
    • Loss assets are loans with losses identified by the bank, auditor, or inspector that need to be fully written off.
  • Restructured Loans – assets which have an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures. Hence, under restructuring a bad loan is modified as a new loan. A restructured loan also indicates bad asset quality of banks. This is because a restructured loan was a past NPA or it has been modified into a new loan.
  • Written off Assets – assets/loans which aren’t counted as dues. The financial statement of the bank will indicate that the written off loans are compensated through some other way.