Large corporate borrowers account for the highest volume of bank loan write-offs (an accounting process wherein the lender removes the amount of bad loan from its books or active balance sheet). The process allows the lender greater flexibility to lend. 

While banks are wary to offer loans to micro small and medium enterprises (MSMEs) or other smaller entities for fear of default, the problem aggravates due to non payment by large companies.   

Take the case of the ₹9000 crore Kingfisher loan default in 2012. It brought to light the fact that the massive corporate exposures fell into default even after they were restructured many times. From then, several measures have been put in place but the situation on the ground remains more or less the same.  

Bad Loans

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 MSMEs. But clearly the quantum of default is minuscule compared to the large industries. 

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. Recoveries on the write off amount has been slow and patchy. Less than 20% has been recovered.    

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. "The money that is written off is public money. Cases of wilful default have been rising and this needs to be taken up seriously by the authorities," CH Venkatachalam, All India Bank Employees Association (AIBEA) said.

Insolvency and Bankruptcy Code

The last 10 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 Insolvency and Bankruptcy Code Amendment Act has just been approved by Parliament.

“In sum, the government’s move is both welcome and necessary but for India's insolvency architecture to be truly future-ready, this amendment must be seen as part of a broader, ongoing reform process, not its culmination,” Shweta Bharti, legal expert and managing director, Hammurabi and Solomon had earlier told The Secretariat.