New Delhi: The issue of loan waiver and waiver is in the news once again, which is powered by Latest RTI Disclosure Canara Bank said it has written off loans worth Rs 1.29 lakh crore in the last 11 years.
However, the buzz around it not only wrongly equates loan waiver with loan waiver, but also misses out on a significant improvement in the write-off behavior of public sector banks.
After the Canara Bank disclosure, several opposition leaders and political commentators – including lawyers Prashant Bhushan and CPI(M) general secretary Sitaram Yechury – took to social media to criticize the government over the alleged “looting” of public money as a result of loan write-offs by public sector banks. and also Congress spokesperson And leaders It seems that there are wrongly written off loans for the forgiven loans.
Data provided by Minister of State for Finance Bhagwat Karad written answer In the Rajya Sabha on August 2, it was shown that over the last five years, the amount written off by public sector banks has steadily declined to Rs 1.08 lakh crore in the financial year 2021-22, from Rs 1.83 lakh crore initially increased in 2018-19. crore became Rs.
Also, the amount recovered from the written off loans increased to Rs 24,739.1 crore in 2021-22 from Rs 10,451.14 crore in 2017-18. This reduction in write-offs, as well as an increase in recoveries, means that recovery as a proportion of written-off loans increased from 8.2 per cent in 2017-18 to 22.9 per cent in 2021-22.
While this is still a low percentage of recovery, it is good news for the public banking system that the recovery has improved over the years, two of which have been badly hit by the COVID-19 pandemic.
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waiver vs write-off
Debt forgiveness is a process in which the liability of a person or entity is removed. That means there is no need to repay the loan. These are mostly in the form of farm loan waivers ordered by state or central governments, often as a political tool to woo the agricultural vote.
As per RBI regulations, a write-off is a technical requirement for banks, where banks first make provision for bad loans, and then remove the remaining amount from the balance sheet. This is beneficial for banks as it increases their lending capacity.
“As per the guidelines of RBI and the policy approved by the Boards of the Banks, non-performing loans, inter alia, in respect of which full provision has been made on the completion of four years, are removed from the balance sheet of the concerned bank. Is. By way of write-off,” MoS Karad had said in a written reply to a question asked by Congress leader Mallikarjun Kharge in the Upper House on August 2.
Another reason why exemptions and write-offs are generally not comparable is because the beneficiaries are different. In an exemption, the beneficiaries are the bank and the borrower. In a write-off, the beneficiary is only the bank. There is no benefit to the borrowers by writing off their loans.
In other words, forgiven loans are not recovered, as the process itself takes place to erase the debt. So, when a government announces an exemption, it pays directly to the bank and the borrower becomes free from debt. However, recovery of the written off loans is a continuous process and does not stop when the loans are removed from the balance sheet of the bank.
Karad had said, “Banks evaluate/consider the impact of the write-off, as per their Board approved policy, to clean up their balance sheets, avail tax benefits and optimize capital.” His Rajya Sabha reply.
“As the borrowers of the written-off loans are liable for repayment and the process of recovery of dues from the borrower in the written-off loan accounts is on, the write-off does not benefit the borrower,” he explained. .
Overall, loan waivers are considered a better option, at least from a financial point of view, as they mean the bank is paid in full and the borrower – often a poor farmer – is freed from the burden of debt. Madan Sabnavis, chief economist at Bank of Baroda, told ThePrint.
Sabnavis explained, “If the government says it is waiving farm loan of Rs 100, then the government will have to pay Rs 100 to the bank so that the debtor’s liability is completely wiped out.” “As far as the bank is concerned, the loan is repaid on time. Hence discount is a better option for the bank.
Conversely, in a write-off, the bank not only has to make provision for bad loans, which affects its profits, but the recovery process must also continue.
However, while relaxation can be beneficial in terms of finances for both the bank and the borrower, there are some drawbacks to the process as well.
“In case of waiver, there is always a moral hazard, which is always an advantage of not paying back the bank, if the borrower is aware that a waiver announced by the government is being announced,” Sabnavis said. Sabnavis said.
“The exemption is usually for agricultural loans. So, if a farmer, even one who usually pays the loan on time, knows that the election is coming and the announcement of a waiver is high, he may stop paying back the loan in anticipation of that waiver. will,” he added.
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Is loan waiver effective?
1 july ‘Special Report on Agriculture’ State Bank of India found that farm loan waivers announced by eight state governments since 2014 have largely failed to benefit farmers themselves. However, the study, which covered nine states, indicates that some states have performed better than others in reaching the beneficiaries.
“Despite much publicity and political patronage, farm loan waivers by the states have failed to provide relief to the intended subjects, breaking credit discipline in select geographical areas and preventing further lending to banks/financial institutions,” the report said. cautioning,” the report said.
It further states that since 2014, out of about 3.7 crore eligible farmers, only 50 per cent of them have received loan waiver amount (by March 2022), although in some states more than 90 per cent farmers have received loan waiver. Of. price. Essentially, a ‘self-target’ given by the state to its subjects.
SBI calculations show that only 5 per cent of the 51 lakh farmers in Telangana who were eligible for the exemption announced by the state government in 2014 actually benefited, while 92 per cent of eligible beneficiaries in Andhra Pradesh benefited from the exemption, He announced that the same year.
“The possible reasons for the low percentage could be: (a) rejection of claims by state governments, (b) limited or less financial space, and (c) change in government in subsequent years,” the report said.
(Edited by Therese Sudeep)
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