Context: According to the Reserve Bank of India (RBI), the Banks have written off loans worth Rs 10 lakh crores in the last 5 years leading to fall in NPA to 12-year low of 2.8%. However, Banks have recovered only 18% of the written off loans. Banks were unable to recover 82% of the remaining loans despite adopting various recovery measures.
Relevance of the Topic: Prelims: Key concepts- Non-Performing Asset; Wilful Default; Diversion and Siphoning of Loans; Writing off loans.
Non-Performing Asset (NPA):
- A loan is categorised as NPA if it is due for a period of more than 90 days. Depending upon the due period, the NPAs are categorized as under:
- Sub-Standard Assets: >90 days and less than 1 year.
- Doubtful Assets: greater than 1 year.
- Lost Assets: loss has been identified by the bank or RBI.
RBI’s Concept of Wilful Default:
Person/company defaults on loan repayment:
- Despite having the capacity to repay loans.
- Diverts the loan for some other purpose. E.g., Kingfisher Airlines owned by Vijay Mallya diverted the loans for other related businesses such as Kingfisher Calendar and Formula 1 racing Team.
- Siphoning of funds. E.g., Nirav Modi took loans for business operations but used the loans for personal purposes.
- Sell off the collateral without the knowledge of the Bank.
What is the difference between Diversion and Siphoning of Loans?
- In case of “Diversion of Loans”, loans are used for related businesses. However, in case of “Siphoning”, loans are used for unrelated businesses or personal purposes.
Recovery Measures:
Why do Banks write-off loans?
- The Bank removes the written off loan from its balance sheet and reports the amount as a loss. Hence, the Banks can show lower profits and hence reduce their tax liability.
- E.g., Let's say, the Bank has total profits worth Rs 1000 crores and written off loans worth Rs 100 crores. Then the Net profits (Profits- Written off loans) of the Bank would be Rs 900 crores. Thus, the Bank would be required to pay tax on Rs 900 crores (and not Rs 1000 crores).
Recent controversy over RBI's Framework for Compromise Settlement and Technical Write-offs (2023)
- Under this framework, Banks can undertake compromise settlements or technical write-offs of loans of wilful/fraud defaulters. Further, the RBI also allowed wilful defaulters or a company involved in fraud to get fresh loans after 12 months of executing a compromise settlement.
- It is considered to be a detrimental step as it only rewards wilful/fraud defaulters but also sends a wrong message to the honest borrowers who strive to meet their financial obligations.