While scheduled commercial banks (SCBs) wrote off a staggering amount of over Rs 10.5 lakh crore in the five years leading up to March 31, 2023, they have also seen a rise in the percentage of wilful defaulters while facing difficulties in recovery.
Recent reports indicate that the combined write-off of bad loans by both private and public sector banks reached Rs 2.1 lakh crore in the fiscal year 2022-23, surpassing the previous year’s figure of Rs 1.7 lakh crore. Nevertheless, out of the total of Rs 5.9 lakh crore in bad loans written off over the past three years, only Rs 1.1 lakh crore has been successfully recovered.
Over the last three years, banks have managed to achieve a recovery rate of approximately 18-19%. This outcome can largely be attributed to factors such as the declining value of secured assets, interference from promoters, inadequate enforcement measures, and complications in realizing security assets.
While many public sector banks publicly disclose the amount recovered from written-off loans, private sector banks tend to withhold specific figures. Notably, public sector banks were responsible for around 62% of the total write-offs during the past three years.
The process of recovering funds from fully written-off accounts faced challenges in the first quarter due to the extended timeline of non-performing asset (NPA) classification. Accounts with aged NPAs encountered lower recovery rates due to the extended duration of the NPA ageing process.
Banks have intensified their efforts to recover loans that have been written off, despite ongoing challenges in the loan recovery process. At the same time, experts have observed a rise in the percentage of wilful defaulters within the banking sector.
These intensified efforts to recover written-off loans align with reports indicating that the Finance Ministry has urged public sector banks to elevate their recovery rate from these accounts to 40%, a significant increase from the current rate of around 18.6%.
IBC recovery tepid
The Insolvency and Bankruptcy Code (IBC) process has not yielded the desired results due to protracted insolvency resolution procedures and the involvement of multiple legal disputes. These factors have led to delays in effectively resolving stressed assets.
Banks frequently engage in writing off bad loans as a standard practice to cleanse their balance sheets and achieve enhanced tax efficiency. Such write-offs are carried out in accordance with regulations set by the Reserve Bank of India (RBI) and policies endorsed by bank boards. Importantly, borrowers of written-off loans remain legally responsible for repaying the amounts owed.
Banks deploy various strategies to recover from write-offs, including restructuring existing debt, offering one-time settlements, altering the management of defaulting entities, and transferring debt to asset reconstruction companies.
Although numerous banks experienced an upswing in recoveries from write-offs on an annual basis during the April-June period, the gains were considerably lower when compared sequentially.
Banks often intensify their recovery endeavours in the final two quarters of the financial year in a bid to meet their targets.
The hurdles
The pursuit of recovery encounters several hurdles. Non-operational or under-construction assets face diminished marketability. Furthermore, situations where resuming operations require substantial working capital or completing projects necessitates significant capital costs add to the complexities.
Additionally, recovery from written-off accounts can prove intricate when assets are embroiled in litigation. Instances have arisen where successful bidders for assets declined to execute the stressed asset resolution plan due to business devaluation resulting from court-related delays.
The recovery of unsecured loans presents its own set of challenges due to the absence of collateral.
Experts contend that constant real-time monitoring of stressed assets is vital to expediting recoveries. Effective account monitoring can provide early warning signals, allowing lenders to take proactive measures to address potential stress scenarios.
Analytics can play a pivotal role in prioritising accounts, particularly in the retail segment, thereby contributing to improved settlement rates.
