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Loan write off- All you need to know

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Aditya Pathak
Student of Madhav Institute of Technology & Science, Gwalior

Indian banks have been written off 68,607 crore of top 50 willful defaulters including Vijay Mallya and absconding Mehul Choksi, according to an RTI filled by Saket Gokhale.

Various self proclaimed independent political journalists are trying to politicize simple banking exercise into a political tumult, blending technical terms and intentionally harming banking business model for their own political gain.

Write off is a general banking process to remove loss assets (bad loans) and associated provisioning from their balance sheets which improve their net profit. We should know how banks classify assets and set aside provisions for each category.

Standard assets are those loans which have not defaulted on repayment of principal and payment of interest. At standard asset, provision’s rate vary from sector to sector. Provision for agriculture, small and medium industries is 0.25%.

Substandard assets are those which remain non performing for 12 months or less and underlying collateral is not enough to pay back the loan. Banks need to create a 25% provision of the total outstanding in their books wherein 15% is made for the total outstanding and additional 10% for the portion for which there is no underlying guarantee.

An asset is classified as Doubtful asset if it has remained substandard for a period of more than 12 months.For such assets, lenders need to make 100% provision for the portion of the loan which is unsecured. For the secured portion of the loan, if the asset has remained non-performing for up to a year, then 25% is the required provision, 40% for between one year and three years, and 100% for more than three years.

Loss assets are assets which have been identified by either the bank or external auditors to be permanent non-performer and there are negligible chances of recovering the advance. Such assets should be written off from the books of the lender or else a provision of 100% should be made for them.

In previous quarters many banks posted fall in net profit and this was mostly attributed to the higher provisioning against non-performing assets. If banks remove provisions, net profit will increase.

After write off, banks can also write back these assets. SBI has written back 7,000 crore in Bhushan Steel case.

Write off will not affect in probing of economic offence cases against Vijay Mallya, Nirav Modi and Other economic offenders.

We can’t deny the transparency issue in Indian Business sector. After the strict Bankruptcy and Insolvency Code and merger of ten banks, Govt should work on transparency in banking system, provide more authority to RBI and strict vigilance on economic offenders.

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Aditya Pathak
Student of Madhav Institute of Technology & Science, Gwalior

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