Debt write-down by a bank is not debt forgiveness

A story published in DNA took social media by storm. It said that loans worth Rs 7,000 crore were “written off” by the State Bank of India, including that of Kingfisher Airlines, promoted by Vijay Mallya.

Twitterati was outraged with this write-off. The sentiment is expressed in this post by Aam Aadmi Party.

This issue was also raised by the opposition in the parliament. Sitaram Yechury of CPI(M), while debating the stress caused to the public by the sudden ban on Rs. 500 and Rs. 1,000 notes, questioned the SBI write-off to Mr. Mallya while the government claims to crack down on black or untaxed money.

It is the term write-off that created huge confusion. Most people understood it as the loan being waived off. However, that is not true.

What does it mean then?

Sanjeev Sanyal, economist, aptly described the difference in these tweets:

Debt write-down by a bank is not debt forgiveness. Just means an accounting cleanup of balance-sheet.Debtor is still pursued and assets sold

— Sanjeev Sanyal (@sanjeevsanyal) November 16, 2016

This is merely means that bank no longer treats loan as a normal asset. It’s now a bad debt although any recovery will be written back

— Sanjeev Sanyal (@sanjeevsanyal) November 16, 2016

Investopedia explains:

Banks prefer to never have to write off bad debt since their loan portfolios are their primary assets and source of future revenue. However, toxic loans, or loans that cannot be collected or are unreasonably difficult to collect, reflect very poorly on a bank’s financial statements and can divert resources from more productive activity. Banks use write-offs, which are sometimes called “charge-offs,” to remove loans from their balance sheets and reduce their overall tax liability.

When a nonperforming loan is written off, the lender receives a tax deduction from the loan value. Not only do banks get a deduction, but they are still allowed to pursue the debts and generate revenue from them. Another common option is for banks to sell off bad debts to third-party collection agencies.

Earlier this year, in response to a story published in the Indian Express, the Finance Ministry had said that write-offs “are basically technical” and “part of the balance sheet cleaning exercise and these loans continue to remain outstanding in the branch books.” It added: “Recovery efforts continue to be made in the respective branches with respect to these bad loans. Write-off does not mean that recovery comes to a stop.”

The Reserve Bank of India also offered a similar explanation: “‘Writing off’ of non-performing assets is a regular exercise conducted by banks to clean up their balance sheets. Substantial portion of this write-off is, however, technical in nature. It is primarily intended at cleansing the balance sheet and achieving taxation efficiency. In ‘Technically Written Off’ accounts, loans are written off from the books at the Head Office, without foregoing the right to recovery. Further, write offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks.”

This is what Finance Minister Arun Jaitley said in response to Mr. Yechury, requesting parliamentarians not to go by the literal meaning of write-off.

Loan to Vijay Mallya’s Kingfisher a write-off ‘only in books,’ but the Govt still pursuing his case: Arun Jaitley in RS

— ANI (@ANI_news) November 16, 2016

So the Finance Minister is technically right: write-off and waived-off have a different meaning.

With this decision, Kingfisher and others would be moved to a category called “Advance Under Collection Accounts (AUCA)”. But interestingly, as per this report, a former chairman of SBI told NDTV that “parking loans in the AUCA category is a sign that the bank has more or less given up hope of recovering the Kingfisher money.”

In fact, Indian Express reported: “In the last three years, the recovery rate (amount recovered as a percentage of additional write-off) for SBI, the largest government bank, has slipped steadily.”

If the recovery rate for SBI was 19.06 per cent in 2012–13, it dropped to 11.71 per cent the next year and declined further to 10.88 per cent in 2014–15, data disclosed in the bank’s annual report reveals. In absolute terms, SBI’s write-offs jumped almost four times from Rs 5,594 crore in 2012–13 to Rs 21,313 crore in 2014–15. It recovered Rs 2,318 crore last year compared with Rs 1,066 crore in 2012–13.

Time will tell how the Mallya story unfolds and if the government will be able to recover money from the exiled tycoon.

Lesson to learn: the same word may have a different meaning in English language and Economics. Be careful.

Originally published at on November 17, 2016.

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