According to data furnished by the Reserve Bank of India (RBI), in the last 5 years, Rs 10 lakh crore in write-offs has enabled banks to reduce their non-performing assets (NPAs).
What is a ‘non-performing asset’?
- A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
- Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
- Substandard assets — Assets which has remained NPA for a period less than or equal to 12 months.
- Doubtful assets — An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
- Loss assets — As per RBI, loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.
Why do banks write off loans?
- AFTER a loan turns bad, a bank writes it off when chances of recovery are remote. It helps the bank reduce not only its NPAs but also taxes since the written off amount is allowed to be deducted from the profit before tax.
- In “Technically Written Off” accounts, loans are written off from the books at the Head Office, without foregoing the right to recovery.
- Further, write-offs are generally carried out against accumulated provisions made for such loans.
- Once recovered, the provisions made for those loans flow back into the profit and loss account of banks.