Banks have been facing the problem of bad loans for a while now. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more.

The bad loans of Indian banks peaked at Rs 10.36 lakh crore as of March 2018. They have come down since then. In a recent answer to a question raised in the Lok Sabha, the government said bad loans as of March 2021 had fallen to around Rs 8.35 lakh crore. Given this, bad loans have fallen by a little over Rs 2 lakh crore between March 2018 and March 2021.
While this sounds like a decent fall, it does not consider the fact that loans worth lakhs of crores have been written off by banks over the years. The following chart plots the loans written off by banks over the years.

Before getting into details, it is important to explain the data sources. The data for the years 2013-2014 to 2019-20 is from the Reserve Bank of India, or RBI. In an answer to a question raised in the Lok Sabha in March 2021, the government had said the bad loans written off by banks between April to December 2020 had stood at Rs 1.15 lakh crore. The Indian Express in a recent story reported that the bad loans written off by banks from January to March 2021 amounted to more than Rs 70,000 crore. This means that the bad loans written off in 2020-21 stood at around Rs 1.85 lakh crore.

Given this, the total bad loans written off between April 2013 and March 2021, a period of eight years, stands at a mind-boggling Rs 10.83 lakh crore. What does this really mean?

Before we get into the details, let’s try and understand what a loan write-off exactly means. Basically, loans which have been bad loans for four years (that is, for one year as a ‘substandard asset’ and for three years as a ‘doubtful asset’) can be dropped from the balance sheets of banks by way of a write-off. In that sense, a write-off is an accounting practice.
Of course, before doing this, a 100 per cent provision needs to be made for a bad loan which is being written off. This means a bank needs to set aside enough money over four years in order to meet the losses on account of a bad loan.

Also, this does not mean that a bank has to wait for four years before it can write off a loan. If it feels that a particular loan is unrecoverable, it can be written off before four years.

What does this mean in practical terms? The overall bad loans of banks as of March 2020 stood at Rs 8.96 lakh crore. The banks wrote off Rs 1.85 lakh crore during the course of the year. This means that bad loans of banks should have fallen to Rs 7.11 lakh crore (Rs 8.96 lakh crore minus Rs 1.85 lakh crore). Over and above this, banks would have managed to recover some bad loans as well, further pushing down the bad loans number.

But, as we know, the bad loans of the banking system as of March 2021 stood at Rs 8.35 lakh crore.

So what happened here? Basically, banks ended up with fresh bad loans during the course of the year, and this pushed up the bad loans to Rs 8.35 lakh crore. Hence, banks continue to accumulate new bad loans. It is just that write-offs after four years help them drive down the overall bad loan numbers and present a much better picture than it actually is. The point being that the accounting eventuality helps banks drive down the bad loan numbers.

Between March 2018 and March 2021, bad loans worth Rs 6.6 lakh crore were written off. Nonetheless, the actual reduction in bad loans was a little over Rs 2 lakh crore from Rs 10.36 lakh crore to Rs 8.35 lakh crore. This is the long and the short of it. It implies that the accumulation of fresh bad loans continues.

In fact, the Reserve Bank says precisely so in the Report on Trend and Progress of Banking in India: “The reduction in non-performing assets (NPAs)…was largely driven by write-offs [of] NPAs older than four years.” Bad loans are also referred to as NPAs in technical terms.

As we know, the total bad loans written off in the last eight years stand at Rs 10.83 lakh crore. If we add this to the bad loans of Rs 8.35 lakh crore as of March 2021, we are looking at total bad loans of Rs 19.18 lakh crore.

This is very close to the Rs 20 lakh crore figure which was suggested by Dr KC Chakrabarty, a former deputy governor of the RBI and a veteran public sector banker. In an interview to Firstpost, Chakrabarty said: “I’ll put the figure around Rs 20 lakh crore…One should include all troubled loans including reported bad loans, restructured assets, written off loans and bad loans that are not yet recognised.”

The write-offs are deemed to be technical write-offs by the RBI. This means that bad loans which have been written off at the head office level of the bank continue to remain bad loans on the books of branches and, hence, recovery efforts continue at the branch level.

If a bad loan which was technically written off is partly or fully recovered, the amount is declared as other income of the bank. Nonetheless, the rate of recovery of loans written off over the years has been abysmal at best.

The total recovery from loans written off by public sector banks between 2000-01 and 2012-13 was around 23.4 percent of what they wrote off. Between April 2014 and March 2018, the total loans written off by public sector banks stood at around Rs 3.17 lakh crore. Of this, around Rs 44,900 crore of loans previously written off, or around 14 per cent, were recovered.

In that sense, there isn’t much of a difference between a loan write-off and a loan waiver.

Vivek Kaul is the author of Bad Money.