Loan Write-Offs: In FY18, 10 banks took Rs 1 lakh crore hit
5 June 2018: At a time when capital is sparse, a grasp of 10 banks has written off loans worth Rs 1 lakh crore in 2017-18. That’s 50% higher than the write-offs that these banks happened in the previous financial year, data collected by FE show. State Bank of India (SBI), which defines write-offs as an advance under collection account (AUCA), wrote off Rs 40,196 crore in 2017-18 as against Rs 20,570 crore in 2016-17.
While it is possible banks may get some of this money, the write-offs are supposed to be significant in the current year too. The hits will come proceeding the liquidation proceedings started for a dozen large companies to which loaners have a total exposure of Rs 2.4 lakh crore. While banks have made arrangements for these forte, in keeping with the Reserve Bank of India’s rules, they may require to write off some of the loan balance.
Most of these near-bankrupt companies have initiated buyers under the Insolvency and Bankruptcy Code (IBC) but the sales would necessitate banks taking haircuts anywhere in the range between 30% and 70%. In the case of Bhushan Steel the haircut has been just about 33% of the admitted claims of Rs 56,000 crore and should UltraTech Cement wins Binani Cement, bankers would get back almost 90% of their dues. However, in the case of Electrosteel Steels, bagged by Vedanta, the hit to banks is a much bigger 60%.
Meanwhile, bids for Essar Steel, which owes lenders Rs 49,000 crore, are understood to have come in at around 38,000 crores. The big loss for banks could come in from the exposure of Rs 45,300 crore to Lanco Infratech, which appears to be headed for liquidation. Again, the best bid for Alok Industries, which owes banks nearly Rs 30,000 crore, is believed to be only Rs 5,000 crore.
There is another lot of more than two dozen companies against which lenders may begin insolvency proceedings; the total exposure that banks have to these companies is Rs 1.2 lakh crore. The government announced in October 2017 that it would recapitalize state-owned banks to the tune of Rs 2.11 lakh crore over the next two years. Of this, Rs 80,000 crore worth of bonds have already been issued.
Loaners write off toxic assets once it becomes exceedingly difficult to recover them. However, these loans are fully provided for and banks are able to get a part of their dues. Once retrieved, the stipulations held for these accounts are reversed. These replacements are clubbed under other income in a bank’s profit and loss statement. For instance, SBI redeemed Rs 5,333 crore from such accounts in FY18, up 35%. Another large public sector banker, Bank of India, could recover Rs 407 crore in FY18 from written-off accounts.
In February 2016, the Reserve Bank of India (RBI) had said that writing off non-performing assets is a legitimate exercise convoyed by banks to blow up their balance sheets. “Substantial portion of this write-off is, however, professional in nature. It is primarily meant for cleansing the balance sheet and reaching taxation capability,” the central bank had said
According to the central bank, in ‘technically written off’ accounts, loans are written off from the books at the head office, without forgoing the right to recovery. Referring a reply in the Rajya Sabha, news agencies reported in April, public sector banks wrote off Rs 2.42 lakh crore deserving of loans between April 2014 and September 2017.