Technical write off of NPAs by Banks
Technical write off:
An absolute Modi hater by name Saket Gokhale inquired with RTI about the amounts written off by our banks.
On getting the information that xyz amount was technically written off, Gokhale thought he has reached heaven and possibly gave that information to His Master's Voice - who else but Congress.
That has given the jobless Congress leaders something for time pass..
Cutting the boring story short, here, I am giving for information and knowledge of all as to what a technical write off means:
Technical write offs – technical write-off is basically an accounting practice.
The central bank defines technical write-offs as bad loans that have been written off at the head office level of the bank but remain as bad loans on the books of branches and, hence, recovery efforts continue at the branch level.
They are also known as Prudential write offs- and are permitted by RBI and the details of such write offs are disclosed in the balance sheets of all the banks who have undertaken such an exercise.
So it is allowed by RBI and legal also. Banks have the right to pursue and recover the dues in such written off accounts and the delinquent borrowers are not spared.
Now why should banks do such write offs and why RBI is permitting this?
Normally Banks will do such technical write offs only after having completed the recovery measures and on finding that it will take much longer time to resolve these accounts.
The NPAs are huge drain on the bank’s profitability and the main reasons for it are:-
1, Banks have to increase its capital when the NPA increases.
2. They have to make huge provisions towards the NPA and these provisions will increase with the passage of time.
NPAs are classified into three categories, viz, Substandard, Doubtful and Loss assets. Doubtful Assets are further classified into 3 categories as DB-1, DB-2 and DB-3. For Loss Assets banks have to make 100% provision, while for other NPAs Banks have to increase the provisions as under with the passage of time:-
NPA category Time period Provision
Substandard First year 15%
Doubtful-1 Second year 25%
Doubtful-2 3rd year to 5th year 40%
Doubtful-3 5 years and beyond 100%
These provisioning requirements cause the biggest drain on the banks’profits.
By technically writing off these accounts, banks can save considerable amounts on their Capital as well as provisioning requirements.
I will illustrate this as under.
Suppose a Bank has decided to do the prudential write off of some of their big loans- amounting to, say, Rs. 1000 crores – since they are remaining as NPAs for long time. Let us assume that these accounts are outstanding as NPA for more than 5 years.
For these loans bank had to maintain a minimum capital of 8%, i.e Rs.80 crores and provision of 100%, viz, Rs. 1000 crores. Now after the prudential write offs the balance in these accounts will be nominal at Rs.100/- only. Bank has saved Rs. 1080 crores by this exercise and it will also reduce its tax burden as the write offis done from its profits.
Now look at the table again- how much amount the bank would have saved, had they did the prudential write off before these accounts had completed 5 years- 60% of Rs. 1000 crores, i.e Rs. 600 crores!
The borrowers are not spared at all and bank will continue with its efforts to recover its dues from the defaulted parties legally & through other measures.
Banks cannot be lethargic in recovering such written off accounts as they have to report the details of such accounts to RBI and as a regulator RBI will .
Besides the prudential write offs as detailed above, Banks can also write off its Loss assets if the security value of such assets are less than 10% of the outstanding amount.
The basic difference between prudential and regular write off is that in Prudential write off there is possibility of recovery at a distant future even after write off while in Regular write off there is no/little possibility of recovery.
Bank has the right to recover the dues from the borrowers whose accounts have been written off, whether on technical grounds or otherwise.
Admittedly Prudential write off is neither a band aid nor a deep surgery. But before a surgery only the patient has to do the fasting and not the surgeon. Banks need not bear the losses continuously- it is not entirely their fault - are not the government, its indiscriminate write offs, dishonest borrowers, slack and slow judiciary and also RBI who remained as a mute spectator when banks lent huge amounts to industries, infrastructure, aviation, power sectors equally responsible?
Loan stress is not completely reduced by write offs, but banks get some relief, for the time being. They can pump in the released provisions for fresh, quality lending. Credit is choked in India because of this huge NPA and the flak that banks get for this spurt in NPA makes them more cautious & credit shy.
An absolute Modi hater by name Saket Gokhale inquired with RTI about the amounts written off by our banks.
On getting the information that xyz amount was technically written off, Gokhale thought he has reached heaven and possibly gave that information to His Master's Voice - who else but Congress.
That has given the jobless Congress leaders something for time pass..
Cutting the boring story short, here, I am giving for information and knowledge of all as to what a technical write off means:
Technical write offs – technical write-off is basically an accounting practice.
The central bank defines technical write-offs as bad loans that have been written off at the head office level of the bank but remain as bad loans on the books of branches and, hence, recovery efforts continue at the branch level.
They are also known as Prudential write offs- and are permitted by RBI and the details of such write offs are disclosed in the balance sheets of all the banks who have undertaken such an exercise.
So it is allowed by RBI and legal also. Banks have the right to pursue and recover the dues in such written off accounts and the delinquent borrowers are not spared.
Now why should banks do such write offs and why RBI is permitting this?
Normally Banks will do such technical write offs only after having completed the recovery measures and on finding that it will take much longer time to resolve these accounts.
The NPAs are huge drain on the bank’s profitability and the main reasons for it are:-
1, Banks have to increase its capital when the NPA increases.
2. They have to make huge provisions towards the NPA and these provisions will increase with the passage of time.
NPAs are classified into three categories, viz, Substandard, Doubtful and Loss assets. Doubtful Assets are further classified into 3 categories as DB-1, DB-2 and DB-3. For Loss Assets banks have to make 100% provision, while for other NPAs Banks have to increase the provisions as under with the passage of time:-
NPA category Time period Provision
Substandard First year 15%
Doubtful-1 Second year 25%
Doubtful-2 3rd year to 5th year 40%
Doubtful-3 5 years and beyond 100%
These provisioning requirements cause the biggest drain on the banks’profits.
By technically writing off these accounts, banks can save considerable amounts on their Capital as well as provisioning requirements.
I will illustrate this as under.
Suppose a Bank has decided to do the prudential write off of some of their big loans- amounting to, say, Rs. 1000 crores – since they are remaining as NPAs for long time. Let us assume that these accounts are outstanding as NPA for more than 5 years.
For these loans bank had to maintain a minimum capital of 8%, i.e Rs.80 crores and provision of 100%, viz, Rs. 1000 crores. Now after the prudential write offs the balance in these accounts will be nominal at Rs.100/- only. Bank has saved Rs. 1080 crores by this exercise and it will also reduce its tax burden as the write offis done from its profits.
Now look at the table again- how much amount the bank would have saved, had they did the prudential write off before these accounts had completed 5 years- 60% of Rs. 1000 crores, i.e Rs. 600 crores!
The borrowers are not spared at all and bank will continue with its efforts to recover its dues from the defaulted parties legally & through other measures.
Banks cannot be lethargic in recovering such written off accounts as they have to report the details of such accounts to RBI and as a regulator RBI will .
Besides the prudential write offs as detailed above, Banks can also write off its Loss assets if the security value of such assets are less than 10% of the outstanding amount.
The basic difference between prudential and regular write off is that in Prudential write off there is possibility of recovery at a distant future even after write off while in Regular write off there is no/little possibility of recovery.
Bank has the right to recover the dues from the borrowers whose accounts have been written off, whether on technical grounds or otherwise.
Admittedly Prudential write off is neither a band aid nor a deep surgery. But before a surgery only the patient has to do the fasting and not the surgeon. Banks need not bear the losses continuously- it is not entirely their fault - are not the government, its indiscriminate write offs, dishonest borrowers, slack and slow judiciary and also RBI who remained as a mute spectator when banks lent huge amounts to industries, infrastructure, aviation, power sectors equally responsible?
Loan stress is not completely reduced by write offs, but banks get some relief, for the time being. They can pump in the released provisions for fresh, quality lending. Credit is choked in India because of this huge NPA and the flak that banks get for this spurt in NPA makes them more cautious & credit shy.
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