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Loan write-off

  • IASbaba
  • November 25, 2022
  • 0
Economics
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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)

  1. It helps in understanding the present risk of a firm that a bank is going to give loan to.
  2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
  3. 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. 1 and 2 only
  2. 2 only
  3. 1 and 3 only
  4. 1, 2 and 3

 

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