Context:

• In a surprising revelation, the Union government has disclosed that scheduled commercial banks (SCBs) in India have written off bad loans worth an eye-watering Rs 16.35 lakh crore over the past decade.
• The information was shared in the Lok Sabha by Finance Minister Nirmala Sitharaman in response to a question raised by Member of Parliament Amra Ram.

What are Non-Performing Assets (NPAs)?

• Non-Performing Assets (NPAs) refer to loans or advances for which the principal or interest payment has remained overdue for a period of 90 days or more.
• When customers, whether retail or corporate, fail to repay the loan as agreed, it stops generating income for the bank, making it an NPA. NPAs represent a financial burden on banks, as they cease to earn interest.

The Reserve Bank of India (RBI) guidelines classify NPAs into three categories based on their duration and recoverability:

• Substandard Assets: Loans that have been non-performing for 12 months or less.
• Doubtful Assets: Loans that have been in the substandard category for over 12 months.
• Loss Assets: These are considered uncollectible, having little to no recoverable value, although some recovery may still be possible.

About Write-Offs bad loan:

• When a loan is written off, the lender declares the loan as a loss due to non-repayment, and it's removed from their books as an asset, but the lender may still pursue recovery through legal means. 
• According to the data presented in Parliament, the bulk of the loans written off were concentrated in large industries and services. These sectors alone accounted for about Rs 9.26 lakh crore of the total bad loans written off during this period. The write-offs span across a decade, showing a consistent pattern of significant amounts being written off year after year. Industrial and services sectors have consistently been the main contributors to the rising NPAs.

Implication of written off:

• Writing off bad loans does not mean waiving the borrower's liabilities; it acknowledged that the process is a necessary step when loans undergo full provisioning as mandated by the Reserve Bank of India (RBI).
• The RBI guidelines suggest that loans that have been non-performing for a considerable time (usually four years) and have been fully provisioned can be written off.
• Recovery efforts are still ongoing, with banks continuing to pursue dues through legal mechanisms such as civil courts, debt recovery tribunals (DRTs), and the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC). These efforts aim to recover as much of the written-off amount as possible, though critics argue the actual recovery has been minimal.

Criticism and Concerns of written off

• The massive sum of Rs 16.35 lakh crore in written-off bad loans has raised concerns among opposition leaders and experts. Many have criticized the Union government, arguing that the size of these write-offs reflects poor governance, inefficiency, and a lack of accountability in holding corporate defaulters responsible.
• Meanwhile, financial experts point out that writing off such large sums without effective recovery mechanisms may inadvertently encourage financial indiscipline among borrowers, especially large corporations.

Way Forward

The huge pile of written-off loans raises serious concerns about the stability of India's banking sector and its future financial health. Experts argue that in order to prevent such colossal NPAs from recurring, strengthening corporate governance and imposing stricter due diligence in the lending process are critical.