Banks in India wrote off bad loans worth over Rs 2.09 lakh crore during the fiscal year ended March 2023, according to information obtained through Right to Information (RTI) queries.

With this, the total loan write-offs by the banking sector moved to Rs 10.57 lakh crore in the last five years, as per data provided by the Reserve Bank of India (RBI) to the Indian Express.

Loan write-offs by banks rose to Rs 209,144 crore during the fiscal ended March 2023, compared to Rs 174,966 crore in March 2022 and Rs 202,781 crore in March 2021, as per the RTI data.

Banks have been writing off defaulted loans to reduce the burden of non-performing assets (NPAs) on their books. 

However, the recoveries from these written-off loans have been abysmal, with only Rs 30,104 crore being recovered in FY21, Rs 33,534 crore in FY22 and Rs 45,548 crore in FY23.

The RBI’s RTI reply reveals that banks recovered only Rs 109,186 crore from Rs 586,891 crore loans written off in the last three years. This means that banks could only recover 18.60% of the write-offs during this three-year period.

The huge loan write-offs have helped banks to bring down their gross non-performing assets (NPAs) to a 10-year low of 3.9% of advances in March 2023. Gross NPAs of banks have declined from Rs 10.21 lakh crore in FY18 to Rs 5.55 lakh crore by March 2023, mainly due to the impact of loan write-offs.

The total defaulted loans (including write-offs but excluding recovered loans) amount to Rs 10.32 lakh crore. Including write-offs, the total NPA ratio would have been 7.47% of advances, higher than the 3.9% reported by the banks.

When a bank writes off a loan, it removes it from the asset book. This takes place when the borrower has failed to repay the loan and there is a slim chance of recovering the outstanding amount. 

Even after the write-off, banks are required to continue their efforts to recover the loan using various options. Provisioning must also be made for the written-off amount. As a result of the write-off, the bank's tax liability is reduced as the written-off amount is deducted from the profit.

The defaulted loan, also known as NPA, is then transferred from the assets side and recorded as a loss. A loan is classified as an NPA when the borrower fails to make the principal or interest payment for a period of 90 days or more.

Banks have written off a whopping Rs 15,31,453 crore since FY2012-13, as per the RBI data.

Among individual banks, reduction in NPAs due to write-offs in the case of State Bank of India (SBI) was Rs 24,061 crore in FY2023, Punjab National Bank Rs 16,578 crore, Union Bank Rs 19,175 crore, Central Bank of India Rs 10,258 crore and Bank of Baroda Rs 17,998 crore.

The writing off NPAs is a regular exercise carried by banks to clean up the balance sheet. The recovery process can stretch for years as most of the loans involved in write-offs belong to wilful defaulters and shady promoters who generally don’t pay back to the banks. 

As per RBI data, public sector banks reported nearly 62.45% of the total write-offs, with Rs 366,380 crore in the last three years.