PSBs' loan write-offs twice as much as govt's capital infusion in 7 years

Public sector banks have written off a massive Rs 8 trillion worth of loans during the last 7 years of Narendra Modi government, which is more than double than the amount of capital infused by the government during the period.

Between 2014-15 and 2020-21, the government infused Rs 3.37 trillion into public sector banks. FY19 saw the highest amount of capital infusion during the period at Rs 1.06 trillion. In 2020-21, the government infused Rs 14,500 crore into four public sector banks.

On the other hand, between 2014-2021, government-owned banks wrote-off loans worth Rs 8.07 trillion. FY19 saw the maximum loans being written-off, at Rs 1.83 trillion, following by FY20 when loans worth Rs 1.75 trillion were written off. In the previous financial year, public sector banks’ non-performing assets came down by Rs 1.32 trillion due to loan write-offs, RBI said in response to an RTI. Loan write-offs were particularly high in the last four years with over Rs 1 trillion in each year.

Bad loans in the banking sector started rising from 2011-12 – with public sector banks sharing a disproportionate burden of the stress. Gross NPAs in the banking sector hit a peak in 2018 when they hit 11.5% of the gross advances. Since then, there has been a decline in the trend.

One of the reasons behind the decline in bad loans is the large number of loan write-offs in the last few years.

“The reduction in NPAs during the year [2019-20] was largely driven by write-offs,” the Reserve Bank of India observed in its annual report.

“NPAs older than four years require 100 per cent provisioning and, therefore, banks may prefer to write them off. In addition, banks voluntarily write-off NPAs in order to clean up their balance-sheets, avail tax benefits and optimise the use of capital. At the same time, borrowers of written-off loans remain liable for repayment,” the report said.

Though borrowers remain liable even if the loan is written-off by the banks, data shows reduction in non-performing assets by way of recovery and upgradation, in a particular year was far less than the amount written-off for public sector banks.

RBI data shows, loans written-off by the private sector banks were much lower than their public sector counterparts. For example, loan write-offs by private sector lenders in 2019-20 was close to Rs 54,000 crore – which is less than one-third of public sector banks.

In the four-year period between 2016-17 and 2019-20, government-owned banks wrote off Rs 5.7 trillion, while private sector banks' loan write-offs amounted to Rs 1.54 trillion. Market share of public sector banks in loans is about 60%, while that of private sector banks is 36%.

The clean up exercise of bank balance sheets started in 2015-16 with RBI conducting a special inspection on bank books, popularly known as asset quality review (AQR). The banking regulator found that banks were hiding bad loans by postponing asset classification. A special inspection of the books was undertaken and lenders were asked to classify loans of close to 200 borrowers as sub-standard. This resulted in a surge in bad loans which hit the bank's profitability. As a result, the government had to keep on infusing capital in public sector banks – which was mainly used for provisioning for bad loans. Banks have to set aside capital, known as provision in banking parlance, if a loan slips to sub-standard category.

According to bankers, additions to bad loans have fallen significantly in the last couple of the years as most of the stressed accounts have already been classified as non-performing. Fresh additions to NPAs were also lower as banks have become averse to extending new loans, especially to the corporate sector.

RBI data shows that risk averseness among bankers, coupled with a slowing economy, resulted in a sustained decline in the share of bank credit to the industrial sector in the last 7 years which dropped to 28.9% in 2021 as compared to 42.7% in 2014. On the other hand, the share of loans for personal consumption like auto loans, housing loans, that is retail credit, grew from 16.2% to 26.3% - in these 7 years.