Private Banks in India Exhibit Higher Write-Off Ratios Compared to Public Banks

The Reserve Bank of India’s (RBI) financial stability report has revealed that private banks in India have shown a more proactive approach towards writing off bad loans than their public sector counterparts. This is evident from the significantly higher ratio of write-offs to gross non-performing assets (GNPAs) in private banks, which stood at 47.9 percent, compared to 22.2 percent in public banks. The write-offs are primarily aimed at improving the impaired loan ratio in the banks’ balance sheets. The data also reflects an overall increase in write-offs by both public and private banks over the past two years.

Private Banks Lead in Write-Off Ratios:

The financial stability report highlights that private banks in India have consistently exhibited a higher ratio of write-offs to GNPAs when compared to public banks. In the financial year 2020-21 (FY21), private banks’ write-off ratio was recorded at 31 percent, which further decreased to 26.2 percent in FY22. On the other hand, public banks reported a lower write-off ratio of 17.3 percent in FY21, slightly increasing to 17.7 percent in FY22. This indicates that private banks have been more aggressive in writing off bad loans during this period.

Importance of Write-Offs in Loan Recovery:

When loans are written off, it allows banks to remove them from their books and helps in reducing the burden of non-performing assets (NPAs). By writing off bad loans, banks can improve their financial health, strengthen their balance sheets, and focus on lending to productive sectors of the economy. The write-off process also enables banks to classify such loans as losses and take appropriate measures to recover the outstanding amounts.

Recovery and Impact on Profit and Loss Account:

The RBI (The Reserve Bank of India) report further explains that if a borrower resumes servicing their debt or if the exposure is sold, any recovered amount will be directly recorded in the profit and loss (P&L) account. This implies that if a written-off loan is later recovered, it can positively impact the bank’s financial performance, ultimately contributing to higher profitability.

Trends in Write-Off Ratios:

The data suggest an increasing trend in the write-off ratios for both public and private banks in recent years. This indicates a collective effort by banks to address the issue of bad loans and enhance their asset quality. While private banks have been more proactive in this regard, public banks have also shown an upward trajectory in their write-off ratios.

Conclusion:

The RBI’s financial stability report sheds light on the contrasting approaches taken by private and public banks in India regarding write-offs of bad loans. Private banks have displayed a higher willingness to write off non-performing assets, resulting in higher write-off ratios. This strategy aims to enhance the banks’ balance sheets and improve their financial stability. However, it is important to note that write-offs alone may not guarantee loan recovery, and banks must continue to focus on effective measures for resolving NPAs.