What is it?
The Centre earlier this month
told Parliament that non-performing assets
(NPAs) worth Rs 2.41
lakh crore have been written off from the
books of public sector banks between April 2014 and September 2017. Since the
banks were able to recover only 11% of
the distressed loans worth
Rs 2.7 lakh
crore within the stipulated time, the rest had to be written off as per
regulations. The government, however, clarified that
the defaulters will have to pay back the loans, though they were written off.
So, a write-off is technically different from a loan waiver in which the borrower is exempted from repayment. This,
of course, does not mean banks will manage to collect the dues from defaulting
borrowers.
How did it come about?
For long, India has lacked a proper legal framework to help
creditors recover their money from borrowers. According to the World Bank,
the country ranks 103rd in the world in bankruptcy resolution, with
the average time taken to resolve a case
of bankruptcy extending well over four years. Banks in India, in fact, are able
to recover on an average only about 25% of their money from defaulters as
against 80% in the U.S. Public sector banks have also been lenient in
collecting their dues from defaulting borrowers because of pressure from
powerful interest groups. Instead of classifying sour loans as troubled assets
and taking action to recover them, banks
have often chosen to hide such assets using unethical accounting techniques.
Since 2014, however, the Reserve Bank of India has been stepping up efforts to
force both private and public sector banks to truthfully recognise the size of
bad loans on their books. This caused the reported size of stressed assets to
increase manifold in the last few years.
Why does it matter?
The news about the huge loan
write-off comes amid the Union government’s efforts over the last few years to expedite the process of bankruptcy and
improve recoveries. The Insolvency and Bankruptcy Code (IBC), which came into force last year, was the most notable
among them. Many large corporations, as well as smaller enterprises, have been
admitted to undergo liquidation under the IBC so that the proceeds can be used
to pay back banks. The poor loan recovery reported by the government reflects
poorly on the ability of the new bankruptcy law to help banks recover loans and
mounts more pressure on bank balance sheets. It is notable that the Centre recently vowed to inject Rs 2.11 lakh crore
into public sector banks to cushion their balance sheets from the impact
of bad loans. The poor recovery may increase the size of funds the Centre will
have to allocate for the purpose.
What lies ahead?
It seems unlikely that banks will
be able to drastically improve their rate of recoveries since the new
bankruptcy code is far from perfect. Its critics say the IBC is focussed more on the time-bound
resolution of proceedings than on
maximising the amount of money banks can recover from stressed loans. In
particular, since there are strict
time-limits imposed on the resolution process, there is the imminent danger
that it may lead to the fire-sale of valuable assets at cheap prices. This
can affect investment incentives. But, for now, the quick resolution of bad loans will free resources from struggling firms
and hand them to the more efficient ones.
Credit: The Hindu Explains (http://www.thehindu.com/business/Economy/what-is-the-difference-between-a-loan-waiver-and-a-write-off/article23542930.ece)
No comments:
Post a Comment