Rs 12 Lakh Crore Loans Written Off in 10 Years: PSU Banks Account for Half in the Last 5 Years

India’s banking sector has come under scrutiny once again as reports reveal that loans worth Rs 12 lakh crore were written off over the past decade. Notably, public sector banks (PSUs) accounted for nearly half of these write-offs in just the last five years. This massive write-off raises questions about the effectiveness of loan recovery mechanisms and the burden placed on taxpayers.

The Scale of Write-Offs

Loan write-offs have become a significant issue for India’s financial ecosystem. Over the last decade, Indian banks collectively wrote off Rs 12 lakh crore in bad loans, with public sector banks contributing a substantial portion. The write-off trend has escalated notably in the past five years, as PSUs accounted for approximately 50% of the total write-offs.

The Reserve Bank of India (RBI) defines a loan write-off as the removal of a non-performing asset (NPA) from a bank’s balance sheet, often after multiple failed recovery attempts. However, it does not absolve borrowers from repayment obligations, as banks can continue recovery efforts through legal channels.

Why Do Banks Write Off Loans?

1. Improving Balance Sheets: Banks write off loans to clean up their financial statements and reduce the burden of non-performing assets.
2. Compliance with Norms: Under RBI regulations, banks are required to classify loans as NPAs after a specific period of non-payment. Write-offs are an accounting practice to deal with these NPAs.
3. Focus on Recovery: By writing off loans, banks can shift their focus toward recovery rather than accumulating losses.

However, critics argue that this practice often benefits large corporations and defaulters at the cost of the banking system’s health.

Public Sector Banks: The Bigger Picture

The disproportionate share of public sector banks in loan write-offs highlights systemic issues within India’s PSU banking system. PSU banks, which dominate India’s banking sector, have faced challenges such as:

• Inefficient lending practices that sometimes favor large borrowers without adequate risk assessment.
• Political interference in loan approvals, especially for major industrial projects.
• Delays in legal proceedings, which hinder recovery efforts.

The write-offs have led to concerns among economists and policymakers about the mounting fiscal pressure and the possibility of repeated bailouts funded by taxpayers.

Recovery and Write-Offs: The Misconception

It is important to note that loan write-offs do not mean a complete waiver of the loans. Banks continue recovery efforts through mechanisms such as:

• Insolvency and Bankruptcy Code (IBC): A legal framework to resolve cases of corporate insolvency.
• Debt Recovery Tribunals (DRTs): Forums established to expedite recovery cases.
• One-Time Settlement (OTS): Negotiated settlements to recover a portion of the loan.

Despite these measures, the actual recovery rate remains low. According to reports, banks have only managed to recover a fraction of the written-off loans, leaving significant gaps.

Impact on the Banking System

The massive scale of loan write-offs has both short-term and long-term implications:

• Pressure on Profitability: Banks suffer financial losses, leading to lower profits and reduced capital for fresh lending.
• Taxpayer Burden: Public sector banks often rely on government recapitalization to cover losses, which ultimately impacts taxpayers.
• Investor Confidence: Repeated loan write-offs raise concerns among investors about the stability of the banking system.

The Way Forward: Addressing the Crisis

To address the issue of rising loan write-offs and NPAs, several reforms and strategies need to be implemented:

1. Strengthening Credit Appraisal: Banks must enhance their risk assessment mechanisms to ensure loans are disbursed to viable projects.
2. Accountability for Defaults: Corporate borrowers who willfully default must face stricter legal consequences to deter misuse of loans.
3. Speeding Up Recovery Mechanisms: Existing frameworks like the IBC and DRTs need to be further streamlined to reduce delays.
4. Focus on Technology: Implementing advanced data analytics can help banks monitor loan performance and detect early signs of stress.

Conclusion

The staggering write-off of Rs 12 lakh crore in loans over the last decade raises pressing concerns about India’s banking system, particularly the performance of public sector banks. While write-offs are an essential tool for banks to clean up their balance sheets, the low recovery rates point to systemic inefficiencies that require immediate reforms.

For the banking sector to regain public trust, there must be greater transparency, stricter accountability for defaulters, and improved mechanisms to ensure responsible lending. Without such measures, the cycle of loan defaults and write-offs will continue to burden the economy and taxpayers alike.