The opposition parties have been criticizing the Modi government for writing off bad loans. According to the data from RBI, INR 3.16 lakh crore of loans have been written off from April 2014 to March 2018. To put things in perspective, this is 166 percent of the loans written off by all the 21 public sector banks in the 10 years up till 2014.
Rahul Gandhi has taken a toll at the increasing trend of writing off loans under the Modi supervision. He mocked the government for preventing the common men from using their own money by implementing demonetization and notifications such as mandatory Aadhar linking. On the other hand, the big industrialists get the benefit of writing off loans.
Do you know what writing-off loan is?
Banks use the tool named writing off to clean up their balance sheets. They use the tool in the cases of bad loans or non-performing assets (NPA). We call a loan bad when it gets defaults on loan repayments for at least three consecutive quarters. A bad loan gets written off after that.
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On writing-off the loan, a bank frees the money parked by it for provision of any loan. Provision for a loan refers to the percentage of loan amount set aside by the banks. There is not a fixed rate of provisioning for loans in Indian banks; they vary from 5-20 per cent depending on the sector and the repayment capacity of the borrower. In the case of NPA, 100 per cent of provision amount is required with accordance to Basel-III norms.
In the starting of the year, 12 large bankruptcy cases referred to the National Company Law Tribunal. RBI asked banks to keep aside 50 per cent provision for secured exposure and 100 per cent for unsecured exposure.
How Banks Get Help By Writing-Off Loans?
Let’s take a scenario. There is a bank which has disbursed an INR 1 crore loan to some borrower and 10 per cent is to be set aside as provision. So, the bank sets aside another INR 10 lakh without waiting for the borrower to default on repayment.
Now, the borrower makes an even bigger default, 50 lakh INR. The bank now writes-off additional INR 40 lakh describing it as an expense in their balance sheet in the year of default. That’s not all; it also frees the original 10 lakh INR set aside for provisioning. That money can be used by the banks for business again.
Writing off bad loans has an additional benefit. Writing-off does not mean that bank loses its right to recover the money from the borrower; it has all the right through legal means. Once the bad loan is written-off, any recovery of the loan is considered as profit for the bank in the year of recovery. Altogether, this makes the bank’s balance sheet look good.