Many people including India's opposition parties have been outraged upon reading a recent DNA report on how State Bank of India allegedly wrote off Rs 7,000 crores in loans to 63 of its top 100 willful defaulters, including debt held by embattled liquor baron Vijay Mallya. Mallya was recently declared an 'absconder' by a Mumbai Court on money laundering charges, allowing the Enforcement Directorate to seize all his properties.
Finance Minister Arun Jaitley and SBI chief financial officer Anshula Kant, have been quick to dispel notions that a write-off isn't a waiver and shouldn't be confused as such.
So what is a write-off?
Writing off bad or toxic debt essentially means that those assets have been deemed as difficult to recover. Banks are usually loathe to writing off debt and it is done in extreme circumstances. But the reason they choose to do it is for accounting purposes: non-performing assets or toxic loans, beyond a point, look bad on the balance sheet of a bank and generally add to its overall tax liabilities. Indian banks have also been under pressure by the Reserve Bank of India to make provisions against their bad debt, which constricts their available capital. That means the more bad debt a bank has on its books, the less its ability to invest in other areas and increase lending, something Indian banks have been hamstrung with this year. They have also run into heavy losses as a result of a high proportion of non performing debt and have been under pressure to increase lending.
Write-offs are a very common tool to clean up bank balance sheets around the world. Earlier this year, China's top four banks wrote off 130.3 billion yuan ($19.5 billion) of bad loans for the first half of the year, up 44 per cent from the previous year.
Writing off debt, does not, however, mean that the loan has been waived. Banks can continue to pursue the collection of the bad debts in courts and through other civil proceedings, or choose to sell the debt to third party distressed debt buyers. As in the case of Vijay Mallya, SBI identified Mallya as a willful defaulter in 2015, and has pursued a legal case against him representing a consortium of banks to recover Rs 900-crore in outstanding debt of Mallya's now defunct Kingfisher Airlines.
SBI, as well as a host of public and private banks, have had to become more transparent about bad loans in the wake of former RBI Governor Raghuram Rajan's "Asset Quality Review" mandate for banks to identify these toxic loans in an effort to cleanup their books, and to restore Indian banks back to health.
In its most recent quarter, SBI recorded Rs 6,060 crores in write-offs and Rs 4,613 crore in the previous quarter. Overall, from fiscal 2011 to fiscal 2015, Indian banks have written off a combined Rs 1.76 trillion worth of loans, notes the Mint.
As of September, stressed assets made up an estimated 14 per cent of India's bank assets, according to RBI data. Stressed assets made up about 17 per cent of the loans at public banks, with 6.2 per cent of loans tagged as non-performing.
When do banks waive debt?
Debt waivers or forgiving of debt typically occurs when the debt agreements between the borrower and lender have been amended or the payment schedule of the loan renegotiated with the aim to prevent the company from defaulting. Generally, if a company's debt level is too high, it can also severely hamper the company's ability to invest and put strain on its operations.
Then how do banks recover debt?
Generally, loans are made with an upfront security guarantee to banks as collateral in the event the company defaults on its payments. Under a new law introduced in June this year, a company's assets used to securitise loans can be seized by banks in case of loan defaults. That means if a company is unable to repay loans, banks have the option of taking control of the assets or the company's shares to recover that debt. But up until recently, the legal procedures for banks to confiscate collateral were onerous in India that led to both promoters and banks preferring to wait and watch rather than winding down the promoters' stake and seizing assets, which led to the pile up of bad loans at banks. However, India's new bankruptcy laws are expected to make the recovery process easier for both banks and promoters.
Earlier this year, the Reserve Bank Of India under Raghuram Rajan also introduced a new strategic debt restructuring scheme called the 'S4A," which gave banks a framework to convert a portion of the bad debt in companies into equity (shares) in the borrowing company if it met certain criteria that would determine if their debt was sustainable in the long-term, meaning if they had the capacity to pay the interest on that debt. The objective of the scheme was to help banks exchange a portion of their loans for shares in the borrowing company if reducing their net debt resulted in turning around the company's fortunes while allowing banks to share in the profits in the company's future success.
India has also seen many promoters being tagged as 'willful defaulters.' This is done when the bank deems the promoter has no intention of paying back the debt even if they have the capacity to do so. As in the case of Mallya, SBI labelled him a willful defaulter last year and the case was then pursued in courts.
What is a write down?
In accounting terms, companies choose to write-down assets when the value of those assets has been revised down to adjust for losses or fair market value. Whereas, a write off happens when the asset is completely taken off the company's books.
Write-downs are also very common among companies. Recently, Japanese investor Softbank took a write-down of $555 million in the value of its investments in Ola and Snapdeal in India, which essentially means that it recorded a loss on those investments.
So while a write-off may technically not mean the loan has been forgiven and forgotten to India's biggest corporate defaulters, it remains to be seen if defaulters are brought to book in courts.