The Dual Impact of Bank Loan Write-Offs

Indian banks have written off ₹16.35 lakh crore in bad loans over the past decade, with the highest in FY19 at ₹2.36 lakh crore and the lowest in FY15 at ₹58,786 crore. 
 
While write-offs help clean up balance sheets and enhance lending capacity, they often raise concerns among customers and investors.
 
From an investor’s perspective, large write-offs can hurt short-term sentiment, especially in banking stocks. 
 
However, they may signal a fresh start, enabling banks to lend more and improve long-term profitability. 

 
Investors are advised to consider NPA levels along with other financial fundamentals when evaluating banking stocks. 
 
As of December 31, 2024, 29 companies had outstanding Non-Performing Assets (NPAs) of ₹1,000 crore or more, totalling ₹61,027 crore.
 
For customers, a write-off does not equate to a waiver. 
 
Banks continue to pursue recovery through legal means. 
 
The Ministry of Finance has clarified that written-off loans remain subject to collection. 
 
Public sector banks have recovered ₹2.27 lakh crore from such loans, though recovery rates, especially from large corporates, remain low. 
 
In contrast, recoveries from individuals and small businesses are relatively better.
 
Although write-offs boost a bank’s balance sheet, they require provisioning, which impacts profitability. 
 
Rising NPAs can also dent depositor confidence. 
 
Encouragingly, the RBI’s 2023-24 report noted that gross NPAs dropped to a 13-year low of 2.5% by September 2024, with public sector banks improving significantly—from 14.58% in March 2018 to 3.12%.
 
Despite improvements, challenges in recovering large corporate defaults persist.

Ms. S Mohini Ratna - Editor VARINDIA