Banking

Why PSU Banks Wrote Off Loans Worth Rs 55,356 Crore in Six Months

According to banking sector experts, write-offs help bring down their tax burden.

A cashier displays the new 2000 Indian rupee banknotes inside a bank in Jammu, November 15, 2016. Credit: Reuters/Mukesh Gupta/File photo

A cashier displays the new 2000 Indian rupee banknotes inside a bank in Jammu, November 15, 2016. Credit: Reuters/Mukesh Gupta/File photo

New Delhi: Public sector banks (PSBs) have written off loans of Rs 55,356 crore during April-September 2017, nearly 54% more compared to the same period last fiscal, as per data compiled by rating agency ICRA.

According to a report in the Indian Express on Monday, PSBs had written off Rs 35,985 crore in loans during April-September 2016. The report also noted that over the last decade, banks have written of Rs 2,28,253 crore in nine years (from FY 2008 to FY 2016).

The spurt in PSBs’ asset write-downs is seen as the consequence of bankruptcy proceedings that they have initiated against large corporate defaulters following diktat by the Reserve Bank of India (RBI).

The combined bad loans of 21 PSBs are estimated at Rs 7.33 lakh crore as at the end of September this year.

The RBI in June identified 12 large defaulters including Essar Steel, Monnet Ispat, Bhushan Steel and Bhushan Steel and Power.

PSBs have dragged all these corporate houses to the National Company Law Tribunal (NCLT) and the resolution process is in advanced stages.

According to banking sector experts, write-offs help bring down their tax burden.

Udit Kariwala, senior analyst, India Ratings and Research, told The Wire, “The increase in write-offs by PSBs can be attributed to reducing the overall assets. Many banks reported a profit before tax (PBT) level loss. A write off gives some relief as there are tax write back once a bank writes off the exposure. The write off is also supported by the fact that the stress recognising exercise accelerated two years back and now significant portions of the assets have been added.”

The central bank too has clarified that these write-offs are basically technical in nature and are carried out to cleanse bank balance sheets and bring down tax burden.

“A substantial portion of this write-off is, however, technical in nature. It is primarily intended at cleansing the balance sheet and achieving taxation efficiency. In ‘Technically Written Off’ accounts, loans are written off from the books at the Head Office, without foregoing the right to recovery. Further, write-offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks,” the RBI has said in a detailed note.

According to the RBI, PSBs had written off Rs 2.28 lakh crore in bad loans in the nine years to fiscal 2015-16.

To avoid political controversy over the insolvency proceedings, the government has tightened rules to bar wilful defaulters or those whose loan accounts have been classified as non-performing assets for more than a year from bidding their own assets in auctions which are to be conducted soon.

However, promoters whose companies defaulted on loan repayments due to loss of revenue and profitability under unfavourable market conditions are also being treated on par with wilful defaulters.

Sources said the Insolvency and Bankruptcy Board of India is looking to further tighten bankruptcy code to allow lenders to act against promoters who have given personal guarantees for loans taken by their respective companies.

The government amended the Banking Regulation Act in May this year to empower the central bank to issue directions to PSBs to resolve their bad loans. The extraordinary step was taken by the government as bankers were shying away from taking decisions on resolution of loans which would necessitate accepting deep haircuts for lenders. Bank officials feared that they could face probes in the future if their decisions were seen as favouring borrowers.