Unpacking the Numbers: The Hidden Truth Behind Low NPAs and Surging Write-Offs

The Reserve Bank of India (RBI) recently released its 29th Financial Stability Report, highlighting a “significant decrease” in the gross non-performing assets (GNPA) ratio, which “fell to a 12-year low of 2.8 percent”, while the net non-performing assets (NNPA) ratio of scheduled commercial banks (SCBs) declined to 0.6 percent as of March end 2024. 

While this estimated reduction in NPAs signals a graded process towards macroeconomic stability and a projected positive route for higher bank profitability, it is imperative to scrutinise the aggregate data more closely.

The actual method by which NPAs are reduced—whether through write-offs or recoveries—can lead to vastly different implications for both individual banks and the broader economy. This, therefore, requires closer scrutiny. 

Table 1 below sheds light on the trajectory of Non-Performing Assets (NPAs) in Indian Scheduled Commercial Banks (SCBs) since 2016.  

The data reveals a heartening trend of declining gross NPAs as a percentage of total credit. Following a peak of 11.2 percent in 2017-18, the gross NPA ratio has exhibited a consistent downward trajectory, reaching a favourable 3.9 percent in 2022-23 signifying substantial improvement in the health of the Indian banking sector's loan portfolios. 

However, the role of write-offs in reducing NPAs has been evident. While write-offs contribute to a lower NPA ratio, they represent a financial loss for the bank and don't necessarily translate to actual recovered funds. 

The data reveals that write-offs have fluctuated over the period, with the highest figure recorded in 2020-21 (Rs 2.08 lakh crore). An analysis further highlights the limited growth in recoveries and upgrades of NPAs.  

These figures have consistently remained below Rs two lakh crore annually, except for a slight uptick exceeding Rs two lakh crore in 2020-21. The disparity between write-offs and recoveries suggests that a significant portion of NPAs is being written off rather than actively recovered.  

Another key trend has been the drastic rise in loan write-offs since the current government assumed power.  

In the six years between FY15 and FY20, write-offs surged to Rs 8.7 lakh crore, far surpassing the total of Rs 2.2 lakh crore recorded during the previous 11 years (FY04 to FY14).

Moreover, the data indicates that nearly 50 percent of the Rs 10.6 lakh crore written off in the past five years was related to loans extended to large industrial houses with approximately 2300 borrowers, each with a loan amount exceeding Rs five crore, intentionally defaulting on loans totalling around Rs two lakh crore. 

As highlighted in Figure 1, Between FY 2019-20 and FY2023-24, banks have written off a total of Rs 9.90 lakh crore in loans, according to parliamentary disclosures. 

The highest write-offs occurred in FY 2019-20 at Rs 2.34 lakh crore, followed by Rs 2.08 lakh crore in FY 2020-21. While write-offs have declined slightly in subsequent years, they continue to remain at a significant level, reaching Rs 1.70 lakh crore in FY 2023-24. 

Despite these efforts, recovery rates for written-off loans remain low. An RTI inquiry reveals that recoveries have amounted to only Rs 1,85,241 crore, constituting a mere 18 percent of the total written-off amount. This indicates a substantial loss for the banking sector. 

The magnitude of these write-offs is particularly alarming when compared to the government's fiscal deficit. The written-off amount could have potentially eliminated 59 percent of India's estimated gross fiscal deficit for 2023-24, which was Rs 16.54 lakh crore. 

Although, the data shows a substantial decline in GNPAs from Rs 8.96 lakh crore in March 2020 to Rs 4.80 lakh crore in March 2024 (indicating improved asset quality), the low recovery rate for written-off loans remains a significant concern. 

When we look at the NPA trends in terms of PSBs and SCBs, data presented in the Lok Sabha indicates that PSBs have written off Rs 10.42 lakh crore in loans between FY 2014-15 and FY2022-23.

Despite these substantial write-offs, recoveries have totalled only Rs 1.61 lakh crore, suggesting a recovery rate of less than 16 percent. This means that PSBs could not recover even one rupee as against five rupees written-off during the nine fiscal years starting 2014-15. 

In contrast, Scheduled Commercial Banks (SCBs) have managed to recover a slightly higher amount of Rs 2,04,668 crore in written-off loans during the same period. 

However, even SCBs have faced challenges in recovering written-off corporate loans. The net write-off for private sector banks in FY 2022-23 amounted to Rs 73,803 crore.

Prior to FY14, both Public Sector Banks (PSBs) and Scheduled Commercial Banks (SCBs) exhibited relatively low levels of NPA write-offs. Still, a significant spike in write-offs occurred after FY14, with PSBs experiencing a pronounced increase compared to SCBs.

This trend of rising NPAs written off continued until FY20, indicating sustained strain on the banking sector.  

When examining the performance of private and public banks, a distinct pattern emerges: the number of write-offs in private banks also remains significantly smaller compared to their public counterparts.

This difference is notable even though both types of banks have shown a decline in NPAs over the same period. While both sectors have apparently made strides in reducing NPAs, the disparity in write-offs suggests differing levels of efficiency and risk management practices between private and public banks.

It’s critical for the RBI and the government to take a closer look at this. 

The data shows that major public sector banks have been increasing the loan amount that has been written off with the majority coming in 2020.

While the decline in NPAs in Indian banks is a positive development, a deeper analysis reveals that recovery efforts have been relatively limited. Despite significant write-offs, the recovered amounts remain minimal compared to the total losses. 

Moreover, the accumulation of written-off loans can strain the financial health of the banking system. When banks write off large amounts of bad debt, it reflects a loss of capital that could have been used for productive purposes.

This loss can erode the confidence of investors and depositors, potentially leading to a liquidity crunch. In extreme cases, it can contribute to systemic risks, where the failure of one bank could trigger a domino effect, impacting the entire financial system.

It is essential to revisit the business models of banks and continue to monitor recovery efforts closely. A comprehensive approach is needed to address the root causes of NPAs, such as poor credit appraisal processes, inadequate risk management, and external economic factors.  

For the long-term stability and resilience of the Indian banking sector, it is important to implement policies that promote prudent lending practices and robust risk management. This includes regular stress testing of banks’ loan portfolios, better governance practices, and greater transparency in financial reporting.

By addressing these issues, the banking sector can build a more resilient foundation that supports sustainable economic growth and minimises the risk of future financial crises. 

(Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, Office of Inter-Disciplinary Studies, and Director of Centre for New Economics Studies (CNES), OP Jindal Global University. He is a Visiting Professor at the London School of Economics, and a 2024 Fall Academic Visitor to the Faculty of Asian and Middle Eastern Studies, University of Oxford. Aditi Desai is a Senior Research Analyst with CNES and team co-lead for the InfoSphere initiative. Aryan Gopalakrishnan is a Research Analyst with CNES and graduated from Jindal School of Government and Public Policy. This is an opinion article and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)