Writing-off NPA: Help economy or face-lift banks?

While Indian banks are among the worst in the world in respect of NPA, recent disclosure of ‘writing-off’ outstanding loans of Rs 68,607 crore of 50 willful defaulters created a storm, thanks to COVID-19 crisis which overrides all other news nowadays. This disquieting information received by aN RTI activist from RBI shocked people at the time when Modi Govt is endeavoring to mop up resources to combat the pandemic coronavirus. More so, it is also because of the names of the notorious financial fugitives like Nirav Modi, Mehul Choksi and Vijay Mallya who, the Congress alleged, are closer to the PM. Nirav Modi & his uncle are involved in Rs.11, 000 crore PNB fraud and are Fugitive Economic Offenders.

In normal course, this news would have generated an acrimonious debate especially on TV channels putting the Govt on mat for ‘loosening the noose around 50 top willful defaulters’. But pandemic Coronavirus has sidestepped this ‘financial controversy’. The news came to light a fortnight after freezing of  DA/DR of Govt employees and pensioners reportedly to the tune of Rs. 85.68 thousand crore up till July 2021 in view of burgeoning fiscal deficit and huge funds needed to strengthen health infrastructure in the fight against COVID-19. As the news published, Rahul Gandhi thought it to be right subject to corner PM Modi for his ‘largesse’ to his  ‘mighty capitalist friends’ and he busted out as usual, off the mark, thinking it as “waiving-off” loans.

There are many ‘Rahuls’ among us thinking that writing-off and waiving- off have similar meaning which actually is not. While the nature of both the terms appears to be same but there is big difference between the two, at least in implication.

In financial matters, ‘write–off’ is technical or prudential in nature. In layman language, a Non-Performing Asset (NPA) is a ‘bad loan’. Taking in to consideration all circumstances of non-payment of instalments or interest thereof and non-recovery of loan, RBI broadly defines NPA as “An asset, including a leased asset, becomes non#-performing when it ceases to generate income for the bank.” It is in this situation, ‘writing-off’ is considered. It broadly means that such debt is removed from Bank’s NPA list which nonetheless makes 100 % provision against the outstanding loan and doesn’t stop recovery proceedings or give up its right to recover the loan. The RBI provides norms of four-year provisioning cycle and after full provisioning, the bad loan is written-off. As and when the money is recovered in full or a part, it is added to bank’s profit and the provision kept in books too reduced to that extent.

The term ‘waive-off’ means total cancellation of bad loan without seeking its recovery anymore.  While ‘write-off’ is done by the Bank concerned to bring about tax efficiency as per RBI norms, the waiving-off of loan is done by the Govt mostly as a relief measure in financial crisis like natural calamities (droughts, floods, cyclones etc) to a specific category of loanees who are left with no capacity to return it. The term ‘willful defaulter’ is used for the loan defaulter who has means to pay but doesn’t remit the loan, its instalments or interest thereof to the financial institution.

Under the banking system, no unrecovered loan is left out without any record. Hence, in order to tally the amount in the balance sheet of the Bank, the loan is mentioned as ‘written-off’ but recovery efforts would continue.

There are incidents where a few influential business tycoons have left the country after swindling huge bank loans with no intention to return or repay. They figure in the list of ‘special 50’ whose loans have been ‘written-off’. This is the usual practice with Banks to write-off ‘bad debts’ after a prescribed period. A record bad loan of Rs 2.54 lakh crore were reportedly written-off in 2019.

In fact, writing-off NPA is to give the Banks a facelift without the actual recovery of bad debts. About three years’  ago, the RBI had ordered reference of 12 accounts having bad loans of Rs 3.5 lakh crore to the bankruptcy courts but hardly Rs. 40000 crore could be recovered. Former RBI Governor, Urjit Patel, after abruptly leaving the RBI  in December last year, had said in a lecture that the dismal state of Indian banking system was a failure on the part of banks, the Government and the Regulator until 2014 that led to banks landing into the current bad-loan mess and the resultant low capital buffers.

Once the RTI activist has put RBI information received on April 24, 2020 in the public domain, Rahul Gandhi and Congress spokesman Surjewalla jumped to target PM Modi charging him of “waiving-off”  the loans of Nirav Modis, Mehul Choksi and their companies.  But after the Finance Minister Nirmala Sitharaman hit back at Rahul Gandhi in a thread of 13 tweets, both Rahul Gandhi and Surjewalla preferred to retreat as they seemed to have touched the hornets’ nest. While Dr. Manmohan Singh, whom Sitharaman asked Rahul to consult on writing-off, opted out from the debate, Chidambaram came to his defence a bit through a tweet.

Chidambaram subtly diverted the debate by saying that “ The debate on waiver or write-off is academic. People who are mighty pleased are Nirav Modi, Mehul Choksi and Vijay Mallya!” adding, “Rules are made by human beings. If a rule can be made, it can be unmade too”. It was quite loaded, admitting that rules are there but why can’t these be changed. Yes, amid the political slugfest, a valid question was raised as to why these rules can’t be changed?  Even if the changes or the new law may not get the money back from the swindlers but at least, these would instill the confidence of the people of India. Everybody including critics praises Modi Govt for enactment of Fugitive Economic Offender’s Act, 2018 & the Insolvency and Bankruptcy Code, 2016. India is more important than political interests of political parties and their leaders who always try to score brownie points in exposing each other. Janata sab kuch janti hai.

Banks may take refuge into the technicalities of the system to justify such actions but the confidence of the people of India is shattered especially when they see names of notorious fugitives. The people are fed with routine statements and loud assurances of leaders to bring corrupt and scamsters to book but in practice there is nothing that can lift nation’s confidence. It is a public knowledge that how some mighty economic fugitives had duped the banks with thousands of crores of rupees with all these rules and regulators and right under the vigilant nose of Govt agencies? How the action of writing-off NPA of Rs. 68607 crore going to satisfy the people of India or improve banking system?

It is no credit to Indian banks to figure among the worst in the world, and definitely in the BRICS bloc. As per CARE ratings, India beset with a 9.85% of NPA ratio ranks poor among BRICS countries. According these ranking, Australia, Canada, Hong Kong, Republic of Korea and UK with an NPA ratio of less than 1 percent are classified in first category followed by China, Germany, Japan, and USA, with NPA ratio less than 2 percent. A few developed European countries and some fast-growing developing countries like Brazil, Indonesia, Thailand, South Africa and Turkey fall next with NPA ratio of up to 4%.

In terms of actual money, the NPA of Indian PSBs stood at Rs 7.27 lakh crore and reported Bank frauds at Rs. 1,13,374 crore as on 30 September, 2019. Higher NPA shakes the confidence of investors, depositors, lenders and impedes recycling of funds, which in turn will have damaging effects on the positioning of credit. The non-recovery of loans effects not only further availability of credit but also financial soundness of the banks. Instead of cleaning up balance sheets and subsequently showing higher profit, why can’t RBI and the Govt initiate pragmatic coercive measures to minimise NPA and prevent future loans turning into NPA?