Writing-off Debt of Wilful Defaulters

 

 

Audio Version Given Above

O

n 29^th April 2020, there was news about total debt amounting to Rs. 68607 Crores of top 50 wilful defaulters been written off by the Indian banks. The names of these wilful defaulters were released by RBI in response to a query received under RTI Act.

In this article, I will try to explain the concept of writing off debt of wilful defaulters.

Wilful Defaulter

The definition of Wilful Defaulter is mentioned in the Master Circular of RBI.

In simple words, a borrower is considered a wilful defaulter in any of the following cases:-

a)  The borrower has the capacity to repay but does not repay the loan.

b)  The borrower has used the funds borrowed for purpose other than the intended purpose. For example, a loan is taken for purchasing a machine, whereas, a vehicle is purchased from that money.

c)   The borrower spends the money in such a way that neither the borrower has any asset purchased from that money nor the borrower has the money that was borrowed.

Non- Performing Asset

When a bank disburses debt in any form, it is an asset for the bank.

 As long as the interests and instalment repayments are made on time, i.e. it is generating income for the bank, it is called a Standard Asset.

But when the interest, instalments or both for the said debt are not received by the bank on time, the bank in due time classifies that debt as Non-Performing Asset (NPA).

As per RBI, a term loan is classified as NPA if:

i)                interest due and charged in any quarter is not fully paid within 90 days of the end of the quarter in which it was due

OR

ii)              if the instalment remains due for more than 90 days from the date of payment.

Classification of Non-Performing Asset

As per Master Circular of RBI, NPA is classified in the following categories based on the period for which the asset has remained NPA:

i)               Substandard Asset: Remained NPA for less than or equal to 12 months. Bank will face some loss if the account is not regularised.

       

ii)             Doubtful Asset: Remained Substandard for 12 months. Collection from such an account is improbable.

iii)           Loss Asset: If in case of an asset, the auditors have identified it as a loss and the recovery is impossible.

Provisioning

In daily life we set aside a certain amount for exigency. Similarly, in banking, a percentage of debt given is provisioned as an expense in the Balance Sheet. RBI has stated the percentage of provisioning. The percentage is based on the category of NPA, whether the debt is secured/unsecured and how long it has been in that category.

For Substandard Asset: 15-25%

For Doubtful Asset: 25%-100%

Loss assets should be written off. If they remain in the Balance Sheet then 100% should be provisioned for such assets.

It should be noted that provision is made even for Standard Assets. It ranges from 0.25% to 1% depending on the type of debt.

Writing-off Debt

When a bank realizes that the asset is uncollectible, it is written- off by charging it as an expense. This reduces the reserves and hence the overall capital of the bank also.

Reasons for Debt Write-Off

1)  To present true and fair Balance Sheet: It is misleading for a bank to show a profit in the Balance Sheet, whereas the Notes to Accounts mentions a big amount of NPA. So the banks write-off the debt to present the correct picture.

2)  Prompt Correct Action (PCA) by RBI: With increasing bad loans, RBI can take action against a bank by placing a bank under PCA. It means RBI will impose certain restrictions on the bank for conducting business, e.g. restriction on branch expansion being one of them.

The recent news

In the RTI reply RBI said that Indian banks had written off debt of top 50 wilful defaulters, amounting to Rs. 68,607 Crore.

Following important points should be noted in this regard.

i)               Not whole debt written- off: The debt written- off is not the whole debt taken by the borrower. It is just the part of the debt, which the banks feel is “Loss asset”. For the remaining part of the debt, either the bank has made some recovery by selling the security given for the loan or the bank is in the process of recovery.

For example, Kingfisher Airlines had a debt of approximately Rs. 9,000 Crores but the banks have written-off only Rs. 1943 Crores.

ii)            Debt write-off is not debt waiver: This is a case of debt write-off. The banks have removed the debt from their books. They have not given up the right to recover the debt. They can take legal recourse. The wilful defaulters are still very much liable to pay back the debt.

Whereas, in debt waiver, the bank gives up the recovery of loan due to certain reasons, for example, waiver of farmers’ loans. The farmers need not pay back the loan. The bank will not recover the loan from them.

iii)          Regular activity: Debt write-off is a regular activity. It is not a one-off incident. It has also been done in the past in India.

iv)          Effect: Writing off debt leads to decreasing of reserves. So, a bank to remain adequately capitalised as per norms of RBI may require recapitalisation. In the case of Public Sector Banks, the additional capital is infused by the Central Government.

Conclusion

From this discussion it is clear that Rs. 68,607 Crores debt is written off and not waived off. It is a regular activity of the bank so that it can function as per the regulations of RBI.

***

I hope you all found this article informative and interesting. I will try to post interesting articles in an easy language in this blog. Please keep following and also do share your thoughts about the blog and suggestions for future posts. You can ask me questions in the comments section or mail them to me at: askme[at]aseemjavablogs[dot]com and I will try to answer them.

Want to read other articles? Click HERE