The Canara Bank dispute has politicians confusing loan cancellations with waivers. This is how they are different

New Delhi: The issue of loan cancellations and waivers is once again topical, driven by the latest RTI disclosure by Canara Bank that it has canceled loans worth Rs 1.29 lakh crore over the past 11 years.

However, the discussion around this not only erroneously confuses loan write-offs with loan forgiveness, but also misses the significant improvement in the write-off behavior of public sector banks.

Following the disclosure by Canara Bank, several opposition leaders and political commentators – including a lawyer Prashant Bhushan and Secretary General of CPI(M) Sitaram Yechury – took to social media to criticize the government over the alleged “looting” of public money following the cancellation of loans by public sector banks. Same Congress Spokesperson and leaders seem to have confused canceled loans with abandoned loans.

Data provided by Minister of State for Finance Bhagwat Karad in a written response at the Rajya Sabha on August 2 shows that over the past five years, the amount written off by public sector banks has steadily decreased to Rs 1.08 lakh crore in the financial year 2021-22 after initially increasing at Rs 1.83 lakh crore in 2018-19.

Simultaneously, the amount recovered from loans written off increased to Rs 24,739.1 crore in 2021-22 from Rs 10,451.14 crore in 2017-18. This reduction in amounts written off, coupled with an increase in recoveries, resulted in recoveries increasing from 8.2% in 2017-18 to 22.9% in 2021-22 as a proportion of loans written off.

Although still a low percentage of recoveries, it is good news for the public banking system that recoveries have improved over the past few years, two of which have been hit hard by the Covid pandemic. -19.

Chart: Ramandreep Kaur | The footprint

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Waivers vs. write-offs

Loan waivers are a process by which the liability of a person or entity is removed. In other words, the loan does not need to be repaid. These mainly take the form of agricultural loan exemptions ordered by state or central governments, often as a political tool to attract the agricultural vote.

A write-off is a technical requirement for banks, under the rules of the Reserve Bank of India, where banks first provision against the bad loan in question and then remove the remaining amount from the balance sheet. This is beneficial to banks as it increases their ability to lend.

“In line with RBI guidelines and policy approved by the banks’ boards, non-performing loans, including but not limited to those for which full provisioning has been made after four years, are removed from the balance sheet of the relevant bank by delisting,” MoS Karad said in his written response to a question posed by Congress Leader Mallikarjun Kharge in the Upper House on Aug. 2.

Another reason why waivers and write-offs are generally not comparable is that the beneficiaries are different. In a waiver, the beneficiaries are the banks and the borrowers. In a write-off, the beneficiary is only the bank. The borrower does not benefit from the cancellation of his loans.

In other words, the recovery of canceled loans does not occur, because the process itself is intended to clear the debt. Thus, when a government announces a waiver, it pays the bank directly and the borrower is released from its debt. Recovery of written-off loans, however, is an ongoing process and does not stop when the loans are removed from the bank’s balance sheet.

“Banks assess/consider the impact of write-offs as part of their regular exercise to clean up their balance sheets, take advantage of tax benefits and optimize capital, in line with RBI guidelines and policy approved by their boards of directors” , Karad had said in his Rajya Sabha response.

“While borrowers of written-off loans continue to be responsible for repayment, and the process of recovering borrower dues from written-off loan accounts continues, the write-off does not benefit the borrower,” he said. Explain.

On the whole, loan waivers are seen as a superior option, at least from a financial point of view, because they mean that the bank is repaid in full and the debtor – most often a poor farmer – is released from the debt burden, Madan Sabnavis, chief economist at Bank of Baroda, told ThePrint.

“If the government says they waive an agricultural loan of Rs 100, then the government is supposed to pay the bank that Rs 100 so that the liability of the borrower is completely erased,” Sabnavis explained. “As far as the bank is concerned, the loan is repaid on time. This is why a waiver is a superior option for the bank.

On the other hand, during a write-off, the bank must not only make provisions for the bad loan, which has an impact on its profits, but the collection process must also continue.

However, while waivers can be beneficial to the finances of both the bank and the borrower, the process also has some drawbacks.

“In the event of a waiver, there is always a moral hazard which is that there is always an advantage in not reimbursing the bank if the borrower knows that a waiver is going to be announced by the government,” Sabnavis said.

“Waivers generally relate to agricultural loans. So if a farmer, even one who usually repays the loan on time, knows there is an election coming up and the chances of a waiver being announced are high, then he will stop repaying the loan pending of this waiver,” he added.

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Do loan waivers work?

a july “Special Report on Agriculture” by the State Bank of India has found that agricultural loan waivers announced by eight state governments since 2014 have yielded virtually no benefit to farmers themselves. However, the study, which covered nine states, highlights that some states performed better than others in getting benefits to intended recipients.

Chart: Manisha Yadav |  The footprint
Chart: Manisha Yadav | The footprint

“Despite much hype and political patronage, agricultural loan waivers by states have failed to bring respite to the subjects targeted, sabotaging credit discipline in some geographies and making banks/FIs reluctant to lend. more,” the report said.

He further said that since 2014, out of about 3.7 crore eligible farmers, only about 50% of them have received the loan forgiveness amount (until March 2022), although in some states, more than 90% of farmers have received debt relief. amount. Essentially, a “personal purpose” inflicted by the state on its subjects.

SBI calculations show that only 5% of the 51 lakh farmers eligible in Telangana for the waiver announced by the state government in 2014 actually received the benefit, while 92% of eligible beneficiaries in Andhra Pradesh received the advantage of the derogation announced that same year.

“Possible reasons for a low percentage could be: (a) rejection of applications by state governments, (b) limited or low fiscal space, and (c) a change of government in subsequent years,” adds the report.

(Edited by Theres Sudeep)

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