- 18 Oct 2020
So, as RBI has not made any transaction with the willful defaulters then it is in no position to write off the loans of these people. Hence, the outcries on nonissues should be put to rest as it only helps in creating an environment of panic and distrust among the citizens of India.
The recent events of an RTI agent claiming that RBI has waived off entire loan amount of around Rs. 68,000 crores of willful defaulters and the outcry that has surfaced in the left-lib intelligentsia regarding the same, has put lot of doubts in the minds of Indian populace. But is this true or is it just some misunderstanding? Let us discuss this.
Before we go into the topic, let us understand how the banking system of India works. Banks accepts deposits like term deposits and demand deposits. They give interest on the said term and demand deposits. To meet additional liquidity, these scheduled banks take loans from Reserve bank of India on which they pay interest to RBI, also known as Repo rate.
The banks then lend these amounts in the form of loans to general public and business houses on which they earn interest. The banks can ask for the security or they can lend these amounts without any security.
As per the reports surfacing everywhere that RBI has waived off the loans of these willful defaulters, it should be known that RBI never lends any sum of money to any business house or general public. RBI only deals with banks and government of India. It is the banks which lend to business houses. So, as RBI has not made any transaction with the willful defaulters then it is in no position to write off the loans of these people.
Now coming to the aspect of banks, banks are the one who take risk and lend money. When a bank lends any sum to any business house or person, it is an asset for banks. The interest earned on such asset is recorded as an income and on the basis of which banks further pay interest to their borrowers and also manage other expenses.
As per the NPA norms, banks have to make provision for any bad loan or prospective bad loans. If an asset is unable to generate any income for a period of more than 90 days then they have to recognize it as NPA and make provision for it. This provision is treated as an expense and is just made to clear the balance sheet of the banks at regular intervals.
One can call it as a write off only for the accounting purpose, but the right to recover loans still exist with the banks. Whatever recoveries these banks make after such write offs will be considered as income of the bank and reported accordingly.
Technically speaking it is just to give a clear picture of the banks that these provisions and write offs takes place. It does not make any willful defaulters free from their liabilities. Banks still have the right to recover their loans and interest amounts either by selling of their mortgage or other assets. Hence, the outcries on nonissues should be put to rest as it only helps in creating an environment of panic and distrust among the citizens of India.
Jayant Gattani is an established Chartered accountant and has given various views on ongoing economical and financial situation in the country.