Economics
In News: Banks wrote off more than Rs 10 lakh crore in loans over the last five years, according to RBI under the Right to Information (RTI) Act.
- They have been able to recover only 13% of the $123.86 billion they wrote off.
- Public sector banks write-offs accounted for 72.78% includes SBI, PNB and BOB.
- Private sector banks accounted for 27.2% includes ICICI (highest reduction), Axis Bank, HDFC Bank.
About Loan Write Offs:
- A loan is an asset on the balance sheet of a bank, lent out of depositor’s money.
- Writing off a loan essentially means it will no longer be counted as an asset.
- The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very low chance of recovery.
- The lender then moves the defaulted loan, or NPA, out of the assets side and reports the amount as a loss.
- After the write-off, banks are supposed to continue their efforts to recover the loan using various options and make provisioning as well.
- Significance:
- By writing off loans, a bank can reduce the level of non-performing assets (NPAs) on its books.
- Amount so written off reduces the bank’s tax liability.
- Due to low chances of recovery from written-off loans, it raises questions about the assets or collateral against which the banks lent funds to these defaulters.
MUST READ NPAs
Source: Indian Express
Previous Year Question
Q1.) What is the importance of the term “Interest Coverage Ratio” of a firm in India?(2020)
- It helps in understanding the present risk of a firm that a bank is going to give loan to.
- It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
- The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.
Select the correct answer using the code given below:
- 1 and 2 only
- 2 only
- 1 and 3 only
- 1, 2 and 3
