Large corporate borrowers account for the highest volume of bank loan write-offs (an accounting process wherein the lender removes a bad loan [something that is quite unlikely to be repaid] from the active balance sheet).

This is mainly due to the massive sum they borrow from banks. If defaulted, this could translate into a major debt. 

It's not all corporates, but always a corporate. 

Take the case of the Kingfisher loan default. It brought to light the fact that the massive corporate exposures fell into default even after they were restructured many times. 

Bad Loans

Bad loans are not eliminated; they are registered in other forms. According to the rules, when a loan becomes non-performing and unresolved, a bank eventually writes it down in the book, having made a provision.

There were corporate defaults in the Vijay Mallya Kingfisher loan case, which touched around ₹9,000 crore. There were small yet significant cases, such as the Kanishk Gold Loan Fraud of ₹824 crore, that indicated the diversion of funds. The scale was increased by the Punjab National Bank Fraud, in which the exposure was between ₹13,500.

According to government data, in the past decade, Indian banks have written off about ₹9.75 lakh crore in loans – most of which account for large corporates, since the latter borrow significantly larger sums, as compared to retail or agricultural borrowers.

Defaults By MSMEs

Over the past decade, another trend in loan write-offs also emerged: the gradual increase in defaults by micro, small, and medium enterprises (MSMEs). 

According to statistics furnished in Parliament, loan write-offs have been in the lakhs of crores during the past decade, and large industries have a massive share. This does not amount to a waiver; borrowers remain in debt to the money, and recoveries are slow and patchy. The resultant effect is a system that cleanses its balance sheet on paper, and the latent stress is more difficult to clear, which could be a sign of past failures in lending and supervision. 

Banks do not work in a vacuum. Their capital is founded on their deposits. In the case of the lenders in the government sector, they are backed by the government. The consequences are not kept on balance sheets in the case of a massive default of loans that are not recovered. Recapitalisation, provisioning, and write-offs are absorbed in a mechanism that ends up being underpinned by government funds.

This, in the long run, reinvents lending capacity and risk appetite. The depositors are insured, though the expense of the stability is distributed throughout the financial ecosystem. This weight is indirect, and is more likely to be invisible, but it is carried by everybody in the framework that supports the banking system. 

Insolvency and Bankruptcy Code

The last ten years have seen a tightening of norms by regulators. The Insolvency and Bankruptcy Code altered the manner in which defaults will be resolved, and digital monitoring has rendered transactions more traceable.

However, implementation is still skewed.

The latitude in reporting of anomalies, loopholes in accountability, and post-facto action are still seen in high-profile cases. The rules have been developed at a higher rate than the implementation; as such, the same loopholes can still manifest themselves in other situations. 

The same applies to the recent matters in the HDFC Bank governance issue. The regulation tightening and even more intensive questioning following each episode are taking place, but the same issues still appear. How can these failures recur at all when there is an improvement in oversight and systems have been enhanced? The solution might not be in the design of the policy, but in the way it is implemented.