Loans write off: “Scam by another name”
Dr Santosh Kumar Mohapatra*
Banking sector is mainstay of any economy. Success of an economy depends upon the effectiveness, transparency of the banking sector. But unfortunately, Indian banking industry is crumbling under the saddle of the mounting NPAs, loan write offs, and fraud cases. Recently, a huge controversy erupted when in response to RTI query, RBI revealed that banks have written off bad loans worth staggering amount of Rs 68,607 crore due from 50 willful defaulters. Those defaulters who do not repay despite having capacity to pay, divert or siphon off funds, or dispose of secured assets without bank’s permission are categorized as willful defaulters.
In response to stringent criticism by Rahul Gandhi, Union Finance Minister Nirmala Sitharaman said writing off loans is not waiving it, and asked Gandhi to “consult Manmohan Singh on what the writing off is about”. A cartoon that contains the image of Sitharaman teaching Rahul Gandhi that “loan write off is not same as loan waiver” is viral in social media. In past, on similar case of write off, former FM Arun Jaitley had dubbed “write off” is just an accounting entry of loans. Some say it as an act of prudence, not loan forgiveness.
If “write off” does not expose any weakness of government, then why Sitharaman and Anurag Thakur, had refused to reply to this starred question asked in parliament by Congress MP Rahul Gandhi, in the last budget session on Feb 16, 2020. Why the apex bank also declined to provide the relevant information on overseas borrowers citing a Supreme Court judgment of December 16, 2015? Why government is not publishing name and amount of loans defaulted by willful defaulters?
It is true that there is technical difference between loan write off and loan waiver, but outcomes of both on banking health is devastating. A loan waiver is the cancellation of recovery or refraining from claiming the dues. In simpler terms, banks will completely give up on such loans and no recovery will be made, as in the case of farm loan waivers. While in cases of writing off, recovery can be made. On the other hand, write off of bad loans /NPAs is a regular exercise that banks conduct in order to clean their balance sheet as well as to achieve tax efficiency.
The existing provisions of section 43D of the Income Tax Act, inter-alia, provides that interest income in relation to certain categories of bad or doubtful debts received by certain institutions or banks or corporations or companies, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account for that year or actually received, whichever is earlier. In other words, amounts set aside for making provision for NPAs as above are not eligible for tax deductions.
Therefore, the banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology. Loans that have been bad for four years are dropped from the balance sheet of banks by way of a write-off. This is referred to as a technical write-off and is basically an accounting practice. Although bad loans are written off, borrowers of such loans remain liable for repayment. Recovery of such accounts, however, happens on an ongoing basis under the legal mechanism. If recovered it add to profits of banks.
However, according to Dr KC Chakrabarty ,ex-deputy governor of RBI, there is no policy for ‘technical write-offs’; no justification proposal is required to be put up; there is no formula to decide extent of write-off and nobody knows what happens after the write-off, even though the loans are backed by assets.
A big question percolates in mind: if banks will continue to pursue its recovery after loan is written off, then what percentage of bad loans has been recovered? In reality, just a little more than 10 per cent of loans that are written off by public sector banks are finally recovered from their borrowers. A sum of Rs 4,32,584 crore was written off by the public sector banks between 2015-16 and 2018-19. But only Rs 45659 crore or roughly 10 percent, was recovered from written off accounts in these four years. It means 90 per cent of the bad loans which are written off are not recovered. So, write off is some way loan waiver.
Another question is: if write off is just an accounting entry of loans then why don’t banks write off all bad loans and separately continue recovery? Writing off a loan or asset means it does not have future value or no longer serves the purpose. A non-performing asset is written off after all avenues of recovery are exhausted and chances of recovery of due loan seem remote. Further provisioning of loans written off also reduces the operational profits of banks.
According to KC Chakrabarty, after a technical write-off, when the bad loan is no longer on the books, there is no incentive for banks to pursue recovery. Smaller defaulting accounts are not given the same leeway that the bigger ones are. But the bigger accounts normally have the clout and other means to prevent a bank from recovering their assets. The same is not true for a smaller account that sooner or later pays up due to pressure tactics. In reality, when banks waive off loans of farmers, that is bad economics. When they write off loans of corporates like Mallya is considered as smart accounting.
Chakrabarty is right in stating that the waiver vs write-off debate is an academic one. If a rule can be made, it can be unmade too. Why government doesn’t change rule and prohibit writing off provision. Actually, it is practiced to show the quantum of reduction of NPAs to avoid the criticism. However, quantum of stressed asset that comprises NPAs, restructuring of loans and loan written off remains same as before.
What is reprehensible is that, both the rise in NPAs and amount of loans written off has assumed gargantuan proportion under the present political dispensation which had vowed to “take necessary steps to reduce NPAs in banking sector” in the 2014 elections. It has increased from 2.84 lakh crore in 2013-14 to 11.73 lakh crore in 2018-19. Similarly, bad loans written off has increased from Rs 20,000 crore in 2013-14 to 2.37 lakh crore in 2018-19.
The quantum of loans that were written off is equivalent to half of the total non-performing assets or bad loans. In the last ten years (as on December 2018), total loan written-off is over Rs 7,00,000 crore and more than 80 percent have accrued in the last five years since April 2014. To put this number in perspective, the amount of bad loans written off by public sector banks (PSBs) during the four-year period is well over twice the projected budgetary expenditure on health, education and social protection for 2018-19, at Rs 1.38 lakh crore.
What is abominable is that as per IMF report published on December 2017, at 10 per cent, India is in the more ‘unsatisfactory’ League of Nations with high NPAs worse than UK (0.81), US (1.13), Japan ( 1.19), Singapore (1.40), Malaysia (1.55), Germany (1.69), China (1.74), Argentina (1.84) Indonesia (2.56), France (3.41), Brazil (3.59), Spain with 4.46 per cent. This is likely to witness a spike in the aftermath of Covid-19.
In the name of Insolvency and Bankruptcy Code (IBC), corporate defaulters are relieved of their huge obligation to the banks and these bad loans are sold to other corporates at cheap rates. Banks are losing in the process. Cases referred for recovery under various mechanisms went up by over 27 per cent in volume and tripled in value during 2018-19, leading to a pile-up of bankruptcy proceedings.
In most cases, the RBI has observed that the banks are taking almost 80-90 per cent haircuts. Ministry of Finance officials say the closure of cases through liquidation under IBC has seen a massive value erosion of companies. Let’s check the data collated by the Insolvency and Bankruptcy Board of India (IBBI). Of the 51 liquidation cases in which final reports have been submitted till 31 December 2019, only Rs 96 crore were recovered against Rs 9,870 crore claims admitted. Of the realised amount, Rs 92 crore has been disbursed among the creditors. The asset reconstruction model to help banks recover bad loans appears to be floundering.
It is not NPAs only but bank frauds have been building up over the years. Cases of frauds of more than Rs 1 lakh stood at 4,306 in 2012-13, and rose to 6,801 in 2018-19. As the number of bank fraud cases increased, so did the amount of money sunk owing to these frauds. According to RBI’s annual report for 2018-19, the amount sunk in March 2013 due to bank frauds was Rs. 10.2 thousand crore, which rose to Rs 18699 crore from 2015-16 to Rs 71 543 crore in 2018-19. In the first six months of 2019-20, it has already touched Rs 113374 crore.
The much talk of punishing loans defaulters by government is a sheer hypocrisy. The conviction rate of willful defaulters under this government was 1.14 per cent in 2015-16, even lower than 1.45 per cent in 2014-15. If the government is serious in recovering these loans, why are they not seizing the properties? What is worrisome is that number of willful defaulters has surged 60 per cent in 5 years. In a written answer to a question in the Lok Sabha, Finance Minister Nirmala Sitharaman said the total number of willful defaulters stood at 8,582 at the end of 2018-19, against 5,349 at the end of 2014-15.
What is perplexing is that write-offs affect other depositors adversely. Banks that have a high level of non-performing asset tend to have low deposit rates and keep lending rates high in order to recover the losses on these assets. Hence, very rightly, Dr KC Chakrabarty had dubbed these technical write-offs by banks as a “scam and inequitable”.
Growing NPAs, loan write off, frauds will weaken banking architecture and a scam by another name. During May 2016, a Supreme Court bench headed by chief justice TS Thakur had directed the finance ministry to form a panel to look into the issue of bad loans saying, “something is not working” in the present system and has to be fixed. This is a great opportunity to ensure that corporates do not take advantage of loopholes and repeated restructuring of debt at the cost of the exchequer.
Former RBI governor Raghuram Rajan, who initiated the asset quality review (AQR), while drawing a similar line had also listed “governance issues” and “frauds” as responsible for the NPA growth in the banking sector in his note to the Parliamentary Estimates Committee in September last year. Furthermore, Rajan’s note, in a sign of warning, advised the current government to refrain from setting ambitious credit targets or waiving loans, adding that credit target are sometimes achieved by abandoning appropriate due diligence, creating environment for future NPAs.
What is reprehensible is that non-repayment of bank loans by corporate behemoths, or huge tax concessions given to rich corporations, are dubbed as pro-growth, market-friendly and beneficial to the economy, whereas any concession given to poor farmers in the form of subsidies or loan waivers is treated as populist by the so-called economists. It is wrong, discriminatory and anathema to a welfare state.
The major reason for loans turning into NPAs is that loans by corporate/business behemoths are not spent for the purpose it is made. It is invested in some other purpose or in some other’s business (say relation) from whom bank cannot recover. From day of taking loan, attempt is made by corporate/business how not to repay loan. They take the help of politicians, bureaucrats and pay huge percentage to them and to party funds especially ruling class and defy all laws. Finally, loans turn into NPAs and written off. Defaulters lead a luxurious life, flew to abroad. But bank suffers, depositors suffers a lot. Finally, economy suffers. Those who default rule us indirectly through crony capitalism.
The author is an Odisha-based columnist and economist. Email: [email protected]
DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.