RBI finds banks violating bad loan write-off norms

The Reserve Bank of India (RBI) has detected gross violation of norms by banks when writing off bad loans. In its report to the Parliamentary Standing Committee on Finance, the central bank highlighted an example of a bank found to have made a compromise by settling a bad loan at a loss.

This was despite it holding securities valued greater than the dues owed to the bank.

The RBI has stated in its norms on writing off bad loans that banks should avoid losses by enforcing securities held in their possession or proceed against the guarantors.

In the above instance, the central bank questioned the bank for resorting to a compromise settlement and returning the securities to the defaulter.

The RBI informed the committee of a few cases where banks have extended one-time settlement scheme to wilful defaulters, and have in the process, written off the unrecovered amount. This is not permitted under RBI norms. The parliamentary committee had asked RBI on action it had taken to remedy the violations.

However, the central bank stated that it has "advised" the concerned banks to take "remedial actions". The report did not name the banks, which have breached the regulatory norms. Nor did it identify the amounts or number of banks involved in these violations.

The central bank has traced a trend in a few banks where write-offs of bad loans have been done without the staff being held accountable. At the same time, banks have also not initiated any legal action against the defaulters, stated RBI's report to the committee.

The central bank stated that many of these banks do not have a "satisfactory" system of following up recovery of past write-offs. These disturbing instances were pointed out by RBI's principal inspecting officers in their inspection reports.

The banking industry has written off a whopping Rs 44,767 crore of loans since 1999-2000. The write-offs totalled Rs 13,490 crore in 2003-04, up from Rs 11,620 crore in 2002-03. These write-offs include prudential write-offs to take advantage of the tax shield available in such cases.

Prudential write-offs are ones which are accounted for in the balance sheet, but outstanding dues remain in the books at the branch level. This is to ensure that action initiated against the defaulters in the courts is maintained by the branches.

The write-offs have increased considerably in the last couple of years due to better profitability of banks and also as a means to clean their balance sheets.

Wilful defaults over the last 5 years amounted to Rs 38,600 crore. A wilful default is deemed to have occurred when a borrower defaults in meeting repayment obligations to a lender even when the borrower has the capacity to honour obligations.

Instances where funds borrowed are diverted and used for purposes not stated in the loan applications are also classified as wilful defaults.

Banks are required to initiate criminal proceedings against wilful defaulters wherever necessary and adopt a proactive approach for a change of management of the wilfully defaulting borrower unit.