Context:
Banks wrote off more than Rs 10 lakh crore in loans over the last five years, according to RBI data obtained under the Right to Information (RTI) Act.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- What is a loan write-off?
- Why do banks resort to write-offs?
What is a loan write-off?
- Writing off a loan essentially means it will no longer be counted as an asset.
- By writing off loans, a bank can reduce the level of non-performing assets (NPAs) on its books.
- An additional benefit is that the amount so written off reduces the bank’s tax liability.
Why do banks resort to write-offs?
- The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very low chance of recovery.
- The lender then moves the defaulted loan, or NPA, out of the assets side and reports the amount as a loss.
- After the write-off, banks are supposed to continue their efforts to recover the loan using various options.
- They have to make provisioning as well. The tax liability will also come down as the written-off amount is reduced from the profit.
- However, the chances of recovery from written-off loans are very low which raises questions about the assets or collateral against which the banks lent funds to these defaulters.
-Source: Indian Express
