Private banks more aggressive in writing off bad loans than public banks

The private sector banks in India have been more aggressive when it comes to writing-off bad loans as compared to the public sector banks, according to data from the Reserve Bank of India's (RBI) financial stability report.

The report highlighted that the ratio of write-offs to gross non-performing assets (GNPAs) in private banks was 47.9 per cent, much higher than 22.2 per cent in public banks. These loans are usually written off to improve the impaired loan ratio in the bank's balance sheet.

The data, however, highlighted that both public and private banks have stepped up writing off the loans in the past two years.

The write-offs to GNPAs ratio of private banks in 2020-21 (FY21) and FY22 was at 31 per cent and 26.2 per cent, respectively. The write-offs to GNPAs ratio of public banks in FY21 and FY22 was at 17.3 per cent and 17.7 per cent, respectively.

These loans are taken off the balance sheet and transferred to off-balance sheet records. The write-off does not, however, preclude the bank from enforcing, selling, or transferring the credit to another entity.

In a 2019 article, Karlis Bauze, a financial sector specialist with World Bank's Financial Sector Advisory Centre said, "Writing off a loan does not entail forgiving the debt. The borrower still owes money to the bank; however, the bank has de-recognised this asset from its financial statements due to uncollectibility."

"In case the borrower resumes servicing its debt, or the exposure is sold, a recovered amount would be directly recorded in the profit and loss (P&L) account."