Bank Loans – Write-off
Most of the Indians are under the impression that by writing off loans given to borrowers in the banks are those loans treated as non-returnable ones. This is not so. Even the write off loans of Mallaya and Chokshi and Nirav Mody and etc., amounting to 68000 crores are thought so. In realistic view it is not so. Each one of us has to understand the predicament behind that and analysis of such bad loans. I shall cite you with some examples hereunder which will bring in you the real picture of those exercises. For example a person named A has borrowed some loans from the banks and he had returned the installments and interest intact and settled his dues to the bank means he is not a problem at all.
Suppose A is not able to pay back his loan due to difficulty in his business, comes over to the bankers, pleads his inability, seeks more time for repayment of his credit outstanding, and promises by hook or crook he shall pay it out. Then the bankers will analyse his realistic situation by going into his accounting details and as he has really lost because of promising reasons in the business or diversified his loan and other aspects with his borrowings. If they were satisfied about the promises then they would call the borrower and do the Restructuring of the borrowed amount. There are like this some big borrowers accounts amounting to Crores invested in hospitality business and asked for a restructuring because of loss in business, the banks after analyzing permitted for the same and today he is paying his dues on time with interest and again bounced back to normal levels.
Take for example of A, in a stage where he faces acute losses due to obvious reasons and unable to pay back the bank dues and request the bankers and submits his inability and informs them that he is going to close his business shortly and needs the bank’s help. In such cases bankers will go deep into the cluster of things, analyse the loss aspects including closure of his business whether due to rise in prices of raw materials and competition from the foreign markets like china which is selling its products for half the prices of in India. The bank would have given him about 9 crores as loan and it should have added up interest up to date might have reached around 13 crores. In such a case, request A for a one-time settlement and ask him to pay only the principal amount alone, i.e… 9 crores alone. A might try to sell his property and other assets and settle the bank for 9 crores as One Time Settlement and come out of the ordeal.
We take the case of A again. If he is like our Vijay Malaya who happens to be an intended defaulter and posing to the bankers that he shall pay today and tomorrow and hanging on with the borrowed amount and pleading excuses all the time. Banks will have no other alternative than to auction his properties and bring forth the revenue into his borrowed accounts. More than these bankers can sue the individual in the court for collection of the balance amount too. This authority is vested with the bankers. Like Mallaya the borrower flees to any other country also, our bankers through the government, file an expedite treaty and evacuate the borrower from the foreign country. That is what is happening in Mallaya’s case and very soon, he will be brought in here and proceeded against.
Bankers can also use the above trump card for the corporate borrowers. If a corporate has borrowed enough money from the bank and if they have exceeded more than a lakh of rupees in repaying his installment, the banks can infuse Insolvency Petition against them. The National Company Law tribunal will review this and they would pass on the decision in 90 days’ time. If the tribunal finds fitting of the stage recommended by the bankers then the Corporate will lose its credibility, its directors and others would be fired, and new set of directors will be appointed by the relevant authorities to take control. Suppose keeping enough wealth and the borrowers do not heed to bankers notices and do not repay in time and even after due dates kept dodging means bankers can take up the weapon of implicating Insolvency petition against the borrower and bring him to terms. There are enough names in the market and in the corporate world, people who have dillydallied liked this, once they have been served insolvency petitions, they run in and rush to the bank settle off all the dues to save their integrity and reputations.
The Bad Debts
Again we shall revert back to borrower A, for example he had borrowed from the bank his present outstanding shows at 13 crores and he is not able to pay bank any amount towards his borrowed till march 31st of the particular year. In that case the bank by one time settlement given him 4 crores interest waiver and this waiver is taken as bad debts and they would not account the entire 13 crores in the books of accounts. Hence, they would write off the bad debts portion of 4 crores and show it in the books. They would be deducting this amount in their profits and there would be a provisioning done in the balance sheet. If total amount of 13 crores taken into the account means the bank’s balance sheet will not permit, as the auditors will also prohibit that act. Hence the writing off is done because of all bad debts in every year. Tomorrow any case is proceeded against A is for the total amount of 13 crores and not to 9 Crores. He cannot plead in any court as the bank has written off 4 crores and I shall pay only 9 crores. These are not permissible and please note the bank has the authority to proceed against him for the entire amount of 13 crores.
We may all think if the banks do not lend at all there will not be any problem at all. It is not so, if they accept deposits from the public bankers have to pay interest to them. Unless the banks funds are deployed in credit angles, through which the interest income develops and it is the resource, which goes into payments of salary, expenses of the bank etc. Our Niti Ayog says from the year 2008 to 2014 around 38 lakhs crores have been lent to public is their statement. Of course, every loan is lent with all authority, rules, and regulations safe guarding the interest of the bankers and depositors.
This has been the structure of Indian banking and we need not have any doubt about writing off of the loans, everything is done taking proper care and within the permissions of Reserve Bank of India which is the controlling authority of all banks and it is our central Bank.