India's bad loan problem continues to break records

Every year, India’s bad loan problem scales new heights. The recently concluded financial year was no different. The country’s banks wrote off ₹1.44 trillion (US $21.2 billion) worth of unrecoverable loans in the year that ended March 2018, according to figures from The Indian Express. To put things into perspective, this is five times the GDP of Maldives.

The figure represents a significant jump from 2016-17 and 2015-16, when the banking sector wrote off ₹890.5 billion and ₹712.5 billion worth of loans, respectively.

Unfortunately, most of this money belongs to taxpayers. Since 2009, India’s banks have completed a staggering ₹4.8 trillion worth of write-offs, more than 80% of which were written off by public sector banks.

India’s state-owned banks wrote off ₹1.2 trillion the loans in 2017-18, led by the State Bank of India and Indian Overseas Bank, and their bottom-line results reflected this. The losses recorded by state-owned banks last year totalled ₹874 billion.

Concurrently, the overall amount of non-performing loans in the Indian banking sector rose by over 25% to ₹10.3 trillion as the Reserve Bank of India (RBI) became stricter about the classification of bad loans and India’s new bankruptcy regime took flight.

A matter of accounting

The first step to tackling a problem is the recognition of it. Once a loan is written off, it no longer counts as a non-performing asset, so this can also be viewed as a reduction in bad loans, from an accounting standpoint.

These figures indicate that more loans are being defaulted on, but also that banks are becoming more realistic about clearing their balance sheets. Rather than holding on to the hope that a loan can be recovered, it makes sense to write it off and avail the benefit of a lower taxable income.

By the looks of it, however, the bad loan problem will continue to get worse in the near term before getting better. The RBI will continue to push banks to recognise stressed accounts as non-performing loans without any delays and set provisions aside for them accordingly. This will cause short-term pain but it will be a good move in the long term.

In a positive sign, the Insolvency and Bankruptcy Code (ISBC) has proved to be a minor success since it came into being last year. Out of the 12 cases slated for resolution under the code, only one - Bhushan Steel - has been resolved so far. However, a few more are expected to be resolved this year, which will ease the burden on India’s banks.