Impaired loan write-offs: Private sector banks more aggressive than public sector banks
Private sector banks (PVBs) have been more aggressive in writing off bad loans than public sector banks (PSBs) to rid their balance sheets of such loans and improve the non-performing loan ratio.
This is evidenced by the fact that the write-down ratio of gross non-performing assets (GNPAs) of PVBs at 47.9 per cent in FY23 was much higher than the 22.2 per cent of PSBs, according to the recent RBI financial stability report.
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is reading: Loan write-offs above
In fact, both of the above categories of writedowns have gone up versus the last two years. The write-off ratio to GNPAs is the ratio of write-offs (including technical/prudential write-offs and intermediate settlement) during a fiscal year to the GNPA at the beginning of the year.
The write-down ratio to GDP of PVBs in FY22 and 21 percent was 26.2 percent and 31 percent, respectively. The ratio of writedowns to GNPAs) for PSB in FY22 and 2011 stood at 17.7 percent and 17.3 percent, respectively.
A write-off does not preclude a refund
A write-off is an accounting term for the formal recognition in financial statements that a borrower’s asset no longer has value. Typically, loans are written off when they are 100 percent earmarked and there are no realistic prospects of recovery.
“These loans are being transferred to off-balance sheet records,” Carliss Bowes, senior financial sector specialist at the World Bank’s Financial Sector Advisory Centre, said in a 2019 article.
Bowes emphasized that the delisting does not prevent the bank from imposing, selling or transferring the credit to another entity.
A loan write-off does not entail an assignment of the debt. The borrower still owes the bank money; however, the bank has derecognised this asset from its financial statements due to uncollectibility.
“Should the borrower resume servicing its debt, or sell the exposure, the refund will be recorded directly in the profit and loss (P&L) account,” according to the article.
Managing the balance sheet
Banking expert V Viswanathan opined that banks are resorting to technical write-downs because a low GNPA helps improve market sentiment towards their stocks.
This is an important tool for PVBs because they raise more capital in the form of equity or debt than PSBs do.
Strong private sector banks, with high net interest margin and non-interest income accounting for 30 percent of total income, are able to generate higher operating profits. Therefore, they are in a position to make higher provisions. Post-provisional technical write-offs are more than usual for these banks,” he said.
Viswanathan noted that unsecured advances, including credit cards, are written off gradually once they are determined to be non-performing.
PVBs may write off an unlocked account even in the first year of its downtime. However, in the case of PSBs even if provisions are available, write-off usually does not occur until after two years.