WRITE OFFS REVISITED

Write-offs by banks is a sensitive issue in the public eye. There is always a brouhaha when these figures are revealed by the banks or some enthusiastic researcher obtains the information under RTI and tells all. Whenever quarterly and annual results of banks are announced, the figures of write-offs and NPAs invariably invite close scrutiny.

- P M Bhatnagar

The analyst community, shareholders, and investors minutely probe the levels and more importantly the trends and expected future of these balance sheet/off-balance sheet items and their impact on the profitability of the bank and its financial health. Most bank chairmen know that they have to be well prepared for the glare of search-light on this subject. This could be one reason that bank chairmen often take refuge under the oft-quoted refrain that the worst is behind us... That this hope rarely comes true is another matter.

Though the concept of write-offs has been in place for quite some time, it gained prominence after the implementation of the Narasimham Committee Report (1991) recommendations regarding, inter alia, the 4 fold assets classification according to quality (Standard, Sub-Standard, Doubtful and Loss) and income recognition norms.

The concept gained further traction with RBI's Master Circular dated 30/08/2001 on Prudential Norms on Income recognition, Asset Classification, and Provisioning pertaining to the Advances Portfolio wherein under-provisioning norms for Loss Assets. It clearly states The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. In the same circular, a reporting format for NPAs too seeks data on Gross NPAs and Total Provisions held with a separate below-the-line reporting requirement of Technical write-off of Rs. ………. crore and amount of technical write-off (Rs…….. …crores) and provision on standard assets (Rs………..crore).