Banks have stepped up efforts to recover written-off loans even as delays in the loan recovery process continues. At the same time, the share of wilful defaulters seems to be on the rise , say experts.
“In the last 3 years, banks recovery rate has been roughly 18-19%. This has been mostly on account of erosion of value of secured assets, interference from promoters, ineffective enforcement, and realisation of security,” says Siddharth Srivastava, partner, Khaitan & Co.
According to various reports, private and public sector banks combined wrote-off bad loans worth Rs 2.1 trillion in 2022-23 (April-March), higher than Rs 1.7 trillion in the previous year. But of the Rs 5.9-trillion bad loans written off in the last three years, only Rs 1.1 trillion have been recovered.
While most public sector banks give out the recovery amount from written-off, private sector banks do not give this numbers, specifically. Public sector banks have accounted for around 62% of write-offs in the last three years.
Srivastava added that the Insolvency and Bankruptcy Code (IBC) process has not yielded desired results on account of elongated insolvency resolution process and multiple litigation, and this has led to delay in successful resolution of stressed assets.
The push to recover written-off loans come at a time when the Finance Ministry has reportedly asked public sector banks to enhance recovery rate from these accounts to 40% from around 18.6% currently.
Banks write-off bad loans as a regular exercise to clean their balance sheets and achieve tax efficiency. This write-off is carried out in accordance with Reserve Bank of India (RBI) norms and policies approved by their boards.
But unlike in the case of waivers, borrowers of such loans remain liable for repayment.
“Written off account is basically accounting where 100% provisioning has been made. The recovery efforts are continuing of course. But, the extent of recovery varies from account to account,” IDBI Bank Managing Director and Chief Executive Officer Rakesh Sharma told FE in a recent interview.
Among other mechanisms, banks can restructure existing debt, one-time settlement, change the management of the defaulter entity, and assign debt to asset reconstruction companies to recover from write-offs.
While many banks witnessed a rise in recoveries from write-offs on a yearly basis in April-June, these were far lower sequentially.
“Recovery from 100% written off accounts has been low in quarter one because ageing slippage of NPA classification by the bank has been too old,” Sudharshan Kedia, head – stressed asset resolution group, Resurgent India said.
“When lenders want to do a recovery from old ageing NPA accounts, the recovery from that account would be very low accordingly. The NPA ageing is too old,” he added.
Banks tend to intensify their recovery efforts in the last two quarters of the financial year in a bid to meet their targets, say experts.
Broadly, banks face a plethora of challenges in recovering from write-offs. For instance, an asset loses its marketability if it is non-operational in nature or is under construction. Another scenario is one wherein, resumption of operation requires huge working capital or that the completion of the project requires huge capital cost.
Additionally, recovery from written of accounts can also be a challenge if the asset is being litigated. In some instances, successful bidders of assets have refused to implement the stressed asset resolution plan as the business or company lost its “value and advantage” on account of delay in approval by courts, say experts.
Among specific segments, unsecured loans are relatively difficult to recover due to the absence of a collateral.
“The only challenge (to recover loans from loan write-offs) is so seek whereabouts of the customer. Once that is established, there is no problem in negotiating,” Union Bank of India Managing Director and Chief Executive Officer A. Manimekhalai said.
In order to increase the pace of recoveries, experts feel that banks must monitor stressed assets on a real time basis. Here, proper monitoring of the account can give lenders early warning signals that this account might get into a stress situation, and this would enable them to be proactive rather than reactive.
“Analytics can be used to prioritize the accounts particularly in retail, which also helps in better settlement rates,” Peeyush Dalmia, senior partner, McKinsey & Company said.