Writing and Waiving off Loans

Writing and Waiving off Loans: Prime Problems of Indian Banks

By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com  |  November 18, 2018 9:00 p.m. IST

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Why to write off a loan?

The writing off loan is treated as loss and it reduces the net profit of the bank. The reduction is net profit further reduces the tax liability of the bank. Even after writing off the NPAs, its borrowers are liable to pay the amount of loan to the banks. In order to recover the amount of loans, the banks adopt various tools of recovery. However, before considering a loan as NPA it is seen that such loans had very less probability to have recovery of the amount.

Why the demand of loan waiver for farmers is not justified?

Recently after the increase in the amount of NPAs in banking industry, the people start demanding loan waiver for the agricultural loans. The Government is not considering this demand just due to large number of NPAs in banking industry. Because the loan waiver is quite different from the writing off loans. While writing off loans the amount is still remained due and tools of recovery are used to recover the amount of loan from the creditors. In case of loan waiver, the recovery of such loans which are waived off, is cancelled. Banks have to give up the loans waived off completely and no recovery can be made in such loans. The loan waiver is justified sometimes when the farmers lost their entire income due to natural calamities like poor monsoon, floods, and drought. Such conditions are not in the control of farmers and keeping in view, their weak position to return the amount of loan, the government took decision to waive off their loans. But due to such waiving off of loans, the farmers through their representations, try to get their loans waived off even if they are capable to return the amount of loans.

How writing off and waiving off loans are critical problems for banks?

Both the writing off and waiving off loans are problems for the banks because such practices harm the profitability of the banks. Whenever any loan is provided to a commercial or industrial firm which went into loss and become incapable of returning the loan, the loan becomes Non Performing Asset and required to be written off. On the other hand, whenever the loans are given to farmers and due to their weak financial position, the government waived off their loans; also reduced the profits of the banks.

How banks can get rid of such NPAs?

At the time of providing loans, there is pressure on banking customers to increase the number of loan amounts and each is provided with targets to be achieved. Due to such pressures, the banking employees try to pass the loans of the customers even if they don't have capacity to return the amount of loans. It is must to enforce the policy for fixing accountability of the employees in case of loans amount is not returned by the customers.

Secondly, the banks should constantly monitor the financial position of each creditor so that at the time it seems that the person who took the loan is not performing well, the amount of loan can be recovered early by tools of recovery in the hands of banks.

Thirdly, the government should empower and support the banks to function freely with recovering the amount from the defaulters with strictness.

*Copyright © 2018 Dr. Lalit Kumar. All rights reserved. Dr. Lalit Kumar is a free-lance writer with publication of research papers in various esteemed and reputed journals. Presently he is working as Course Director (Faculty of Financial Management), HIPA, Gurugram (Delhi-NCR), India (Asia).

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