Writing and Waiving off Loans

Writing and Waiving off Loans

By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com 

The developing nations are affected from the concern of low economic growth and most of such nations are suffering from the 'political interventions for subsidizing products and services to the poor'. The public sector enterprises (PSEs) in which the Government hold more than 51% stake, are bound to implement the recommendations of the Government in delivering products and services. The recent concern of 'low profitability of Bharat Sanchar Nigam Limited (BSNL) in India' is also result of such intervention and recommendations. However, in India, the Government has started to move from Government to Governance and continuously taking big steps to cut the subsidies and offering of products and services at lower rates. The Government adopted the path of disinvestment in Public Sector Enterprises.
The Deputy Governor of Reserve Bank of India (RBI) suggested Government to rationalize the schemes and development programmes of education, health, and infrastructure sectors by cutting subsidies. He also suggested to reduce the borrowings by divesting more in public sector enterprise shares and giving bigger room for private players to come ahead for improving efficiency levels in the enterprises**. He also put emphasis upon undertaking more reforms in land, labour, and agricultural sector for promoting private sector.

Central Banks in Economic Growth:

The central banks of all countries around the world, supervise the economic position of their economies. In order to ensure sustainable development, the banks also approach international financial institutions like World Bank, Asian Development Bank, NABARD etc. In September, 2019; the Asian Development Bank (ADB) decided to give $5 Billion to Bangladesh for 2020-2022 aiming to further strengthen the inclusive and sustainable growth in the country. The ADB provided financial assistance on the basis of new Country's Operations Business Plan (COBP) as it contained infrastructure development plans. The Reserve Bank of India (RBI) provided financial assistance to Government of India for infrastructure development of the country. The assistance provided for infrastructure development are fair and normally not questioned by any economist. But providing financial assistance in form of loans to farmers for agriculture, irrigation, or other purposes and then waiving off the loans; is always questioned by the economists.
During April 2014 to April 2018, the public sector banks of the India, written off an amount of Rs. 3,16, 500 crores of their loans standing as Non-Performing Assets (NPAs) in their balance sheets. However, it is a regular practice of banks to write off the NPAs, but after the scam disclosed of Nirav Modi, the writing off NPAs becomes in the light of media and people. Why banks are writing off loans and how waiving off loans is not affecting the financial health of banks? What are the initiatives to make banks getting rid of problem of Non Performing Assets? [Read More]

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?

(i)               Reducing pressure for accomplishing targets in providing credit:

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 donot 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.

(ii)             Empowering banks to recover amount before insolvency:

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. The government should empower and support the banks to function freely with recovering the amount from the defaulters with strictness. The Enforcement Directorate not only recovered amount from the Jewellery and bank accounts of the Nirav Modi but also attached his assets to recover maximum amount of defaulted money. The Enforcement Directorate is able to make recovery because of support of the government.

(iii)          Improving level of governance in Banking Sector:

Thirdly, the banks are motivated to lend more and more money for some specific purposes relating to social welfare and schemes launched by Government. The banks also tried to manipulate the records to show and express that they have been continuously supporting government in fulfilling the provided work. For example, the financial inclusion through Jan Dhan Accounts led to opening of such accounts at war level and the banking staff started to open the accounts as much accounts as possible. The Jan Dhan Accounts further led to credit facilities to the poor people who may not be able to return the loan amounts. Such particular schemes also create the problems and led to NPAs. The banks are not provided any reward for keeping their accounts accurate and present a fair picture. It is required to offer the incentives for ensuring transparency in the banking records.  

(iv)           Overcoming Practical Problems of Banking Sector:

The research studies specifically carried on banking reforms suggest that the banking sector is suffering from various practical problems and it is required to bring systematic solutions. The role of investigative agencies is also under threat as the audit of banking companies is not revealing the irregularities and embezzlement. The government’s role and the functions of RBI to sort out the problems of banking sector; became challenging and banking reforms are required to improve the whole situation. The insolvency code can be further strengthened to reduce the chances of its misuse. 

*Copyright © 2019 Dr. Lalit Kumar.

**This information has been retrieved from "Govt. must reduce borrowing by divesting stake in PSEs: Acharya" published on Pg. 15 of The Hindu on 23rd July, 2019.