A write-off is not a waiver – How are NPAs treated

Policharcha.com | Updated: April 29, 2020, 1:48 IST

RBI and other banks. Write-off of loans worth more than Rs 68,000 crore

Replying to an RTI (Right to Information) query by social activist Mr. Saket Gokhale, RBI released the list of top fifty wilful defaulters, and maintained that banks have written off their loans worth more than Rs 68,000 crore. A mere misreporting of information by some news outlets led a section of civil society to believe that the RBI has waived off loans taken by absconding Mehul Choksi’s Gitanjali Gems Limited, economic offender & former liquor baron Vijay Mallya’s Kingfisher Airlines Limited, among others.

Firstly, RBI lends to only banks and governmental bodies, therefore it was not the RBI, but the banks which wrote-off loans taken by the defaulters. Secondly, writing off loans does not mean that the banks have waived off the debt, and will not pursue the defaulters for recovery. The right to recovery by the banks stays intact in an event of a technical write-off.

Provisioning and Write-off

When a bank gives loan to a borrower, it keeps aside a percent of the amount to be used in the case of non-repayment of the said loan. This procedure is known as provisioning. In the case of non-performing assets (NPA), the banks have to keep 100 percent of the amount as provision. 

Upon reporting an NPA to the RBI, a bank technically writes-off an equivalent amount as asset from its balance sheet. This is because the bank is no longer earning an income (interest) out of the said debt amount, and the debt has gone bad, so it will not be treated as an asset. Writing-off loans provides a clearer and truer picture about the bank’s money making assets to its customers, and help the bank to get a tax break in the losses incurred.

After a write-off when/if the banks make recovery of the concerned loan, the amount is treated as a profit for the banks and goes into their profit and loss accounts.

Non-performing assets

According to norms, a loan or advance is treated as an NPA when the borrower defaults the repayment by 90 days or more.

NPAs are further classified into three categories:-

Sub-standard asset – After defaulting for a period equal to or more than 90 days, if the debtor still does not pay back the interest or principal amount for 12 months, then the asset is considered as a sub-standard asset.

Doubtful asset – If the asset is remained in the category of sub-standard for another 12 months, it is considered as a doubtful asset, given that the loan is backed by a collateral of value more than the liability in the account.

Loss asset – When the sub-standard asset gets no recovery for 12 months, and is backed by a collateral the value of which is less than the liability in the account, the asset is considered as a loss asset.

Backdrop

The names of defaulters had been demanded months ago when Sandeep Singh Jadoun had asked through an RTI about this list, among other things, but the RBI and Finance Ministry did not comply, citing that the relation between a customer and a bank is a privileged one and not up for public scrutiny. Afterwards Dr. MS Acharyulu, former Information Commissioner, in November, had asked the RBI to release such list since it was not against any rules, plus “there is nothing wrong in telling the names of such people to the nation.” A month ago, Congress ex-president, Rahul Gandhi had also sought an answer about the same from the Government in the Lok Sabha, but neither Finance Minister Nirmala Sitharaman, nor Minister of State for Corporate Affairs, Anurag Thakur chose to reply to his starred question . Although, after much contention, while answering to Saket Gokhale’s RTI, the RBI finally came out with the names.

.2 months ago

@Admin exactly.."waive off" is basically a benefit given to the borrower by lender generally in case where he is not able to repay due to various reasons.Here, only waived off portion is written off from the balance sheet of the lender and, borrower will be liable to pay only the remaining amount. However, "write off" is basically only writting off/strucking off the asset (i.e loan given) by the lender (bank) from its balance sheet when it becomes a "loss asset" i.e without extending any benefit to the borrower. So, borrower will still be liable to pay the whole loan amount (unlike in waive off). 

Conclusion: "Write off" is a one sided activity, whereas "Waive off" has effect on both sides (i.e borrower & lender).

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