Prevention Of Write Off Of Bad Loans

Indian Banks Wrote Off Rs. 16.35 Lakh Crore in Bad Loans Over a Decade

The Finance Ministry recently informed Parliament that banks in India have written off a massive Rs. 16.35 lakh crore in bad loans over the past ten years. The Reserve Bank of India (RBI) explained that these write-offs follow regulatory norms requiring banks to make full provisions for Non-Performing Assets (NPAs). The aim is to clean balance sheets, support financial stability, and keep recoveries a top priority.

Bad Loan Write-Offs Over the Years

Source: RBI

RBI and Finance Ministry Clarifications

The RBI clarified that writing off NPAs helps banks clean their books but does not free defaulters from liability. Recovery efforts continue through legal channels such as DRTs, DRATs, and courts under loan recovery laws. Another recovery method is One Time Settlements (OTS), where banks and borrowers negotiate repayment terms.

Finance Minister emphasized: “Such write-offs do not result in waiver of liabilities of borrowers and therefore, it does not benefit the borrower.”

Key Questions Raised

• Can financial stability be achieved if massive loans are written off while recoveries remain uncertain?
• Does writing off loans without actual recovery amount to window dressing in banking terms?
• Even after legal recovery, banks may face a 30%–70% haircut. In such cases, who benefits—banks or borrowers?
• One Time Settlements help in partial recovery, but they also involve sacrifices by banks.

Former RBI Governor Raghuram Rajan once said: “We need a more efficient recovery system—fair, transparent, and focused on value preservation, while punishing mismanagement and fraud.”

Non-Compliance of RBI Guidelines

Despite multiple RBI circulars on credit monitoring and risk management, many banks failed to comply, leading to mounting NPAs. RBI has imposed penalties on several regulated entities for violations.

Penalties Imposed on Banks

The RBI’s Annual Report 2024–25 shows 353 penalties worth Rs. 54.78 crore for non-compliance across the financial sector.

RBI’s Concerns on Compliance and Audits

RBI noted that many banks still lack a strong compliance culture. Compliance officers and auditors often fail to identify irregularities, sometimes even falsifying reports. Concurrent audits—meant to detect issues early—are not always effective due to negligence or weak oversight.

Borrowers’ Role in NPAs

Borrowers also contribute to NPAs due to poor governance, diversion of funds, weak financial discipline, and lack of transparency. However, genuine difficulties must be distinguished from willful defaults or fraud.

Remedies and Responsibilities

Banks and Financial Institutions

• Strictly follow RBI’s compliance guidelines and MSME provisions.
• Ensure timely appraisal, sanction, and monitoring of loans.
• Maintain open communication and hold credit counselling sessions with borrowers.
• Protect customer rights as per the Charter of Customer Rights.

Auditors

• Follow RBI circulars and ICAI’s Guidance Note on Audit of Banks.
• Undertake forensic audits where required.
• Be held accountable for negligence or misconduct.

Borrowers

• Adhere to loan terms and conditions.
• Pay dues and instalments on time.
• Maintain transparent business practices and avoid diversion of funds.
• Manage cash flow effectively and practice good governance.

Conclusion

The proverb “A stitch in time saves nine” and “Prevention is better than cure” perfectly apply here. If banks, auditors, and borrowers act with discipline and accountability, bad loans and massive write-offs can be significantly reduced.

Written By T. R. Radhakrishnan