Introduction

Recently, the Reserve Bank of India (RBI) announced a significant move by writing off a substantial loan amount of Rs 68607 crore for wilful defaulters. This move has sparked a considerable debate regarding its viability in the context of rising Non-Performing Assets (NPAs). This article aims to dissect the intricacies of this decision and provide a balanced perspective, highlighting the legal and regulatory aspects involved.

The Role of RBI in Loan Waivers

It's essential to clarify that the RBI, as an independent central bank, does not have the authority to waive any loans directly. The banks are the actual lenders who extend credit, and it is the banks that are required to manage any associated non-performing assets (NPAs) according to the prescribed guidelines.

Provisions for NPAs: A Regular Practice

Whenever a credit facility goes bad, it results in an NPA. Banks, in a prudential measure, have to make provisions for these amounts over time, reflecting a probable loss in the profit and loss account. Provisions are essentially a percentage of the loan outstanding that is charged to the profit and loss account as a potential loss. As the provisions increase over the years, the asset is considered a loss asset and is written off when the provision reaches 100%. This process is known as a prudential write-off or technical write-off.

The Difference Between Write-off and Waiver

When a loan is written off, the bank removes it from its asset books but remains legally entitled to pursue recovery from the borrower. This is in stark contrast to a loan waiver, where the bank entirely relinquishes the right to recover the loan. In essence, the banks here are just removing the loan from their asset books while still holding the legal right to recovery.

The Fiscal Implications

When the bank regains such written loans, the amount is directly credited to its profit and loss account, thereby increasing its profits. This fiscal maneuver is sometimes seen as a creative solution to deal with NPAs, but it still leaves the non-performing loans on the books of the borrowers, who are still legally obligated to repay.

Classification of Bank Advances

Bank advances are typically classified into two main categories: Standard Assets and Non-Performing Assets (NPAs). These classifications are critical for assessing the health of a bank's loan portfolio and guiding the necessary actions.

Standard Assets

Standard assets are those which do not pose any significant problems and carry only normal risk as part of the business. When a loan turns into an NPA, it is initially classified as Substandard for up to 12 months, and subsequently as Doubtful beyond 12 months, according to RBI guidelines.

Provisioning Requirements

RBI has mandated that banks make provisions against all loans and advances, with different percentages based on the risk assessment. Specifically:

0.4% of the book value is required against Standard assets. 15% is required against Substandard assets. 100% is required against the unsecured portion of doubtful advances. For secured portion of doubtful advances, the provisions are:

1. 25% for doubtful assets up to 1 year.

2. 40% for doubtful assets between 1 and 3 years.

3. 100% for doubtful assets for more than 3 years.

RBI's Independence and the Political Debate

The RBI's decision to write off loans for wilful defaulters has also stirred political debate. Critics argue that this could be a means of giving financial relief to defaulters and aiding the government's fiscal position. However, it is crucial to realize that the RBI is fully owned by the Government of India, and such transfers are akin to a company paying dividends to its shareholders, a standard financial practice.

Conclusion

The RBI's decision to write off Rs 68607 crore for wilful defaulters is a complex issue that involves both financial and regulatory aspects. While it may provide temporary relief to some borrowers, it is important to understand that it is part of a broader set of prudential measures aimed at ensuring the stability of the banking system. The debate around this issue should be based on a proper understanding of the regulations and the financial dynamics involved rather than mere political rhetoric.