Banks clock better loan quality in March quarter on write-offs

For the full fiscal FY25, 10 major banks that have declared their Q4 results so far cumulatively wrote off loans worth ₹80,568 crore compared with ₹74,931 crore in FY24, as per data compiled byMint. These banks are State Bank of India (SBI), HDFC Bank, ICICI Bank, Punjab National Bank, Bank of Baroda, Axis Bank, Federal Bank, Indian Bank, Bandhan Bank and RBL Bank.

In the fourth quarter (January-March), HDFC Bank, ICICI Bank, Bank of Baroda, and Axis Bank, wrote off loans worth ₹3,300 crore, ₹2,118 crore, ₹1,840 crore and ₹3,375 crore, respectively, according to data from their investor presentations, which was anywhere between 11% and 62% higher than in the corresponding quarter of the previous year.

Consequently, the gross NPA ratios of SBI, HDFC Bank, ICICI Bank, Bank of Baroda and Axis Bank were at 1.82%, 1.3%, 1.67%, 2.26% and 1.28% respectively at the end of Q4, which were lower for most of these banks than in the year-ago period.

Lenders typically write-off delinquent or overdue loans where they have minimal expectation of recovery, after these loans have been completely provided for. The practice tends to be accelerated in the last quarter of a financial year as banks look to clean up their books to report strong year-end financials.

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“Private banks’ write offs have gone up primarily due to rising delinquencies in small ticket loans, particularly unsecured retail. The reason being that unsecured NPLs are required to be immediately provided for, as they don’t typically follow a waterfall approach in provisioning, as is generally the case for secured assets,” said Saswata Guha, senior director, financial institutions, Fitch Ratings.

“Hence, banks have limited incentive to hold the asset once it has been fully provided for,” Guha said, adding that while write-offs aren’t unusual, they can be used as a tool to manage the NPA ratio if they are aggressive and done immediately after a loan(s) has become bad. “Given pressures in the unsecured retail space, we believe that banks with higher delinquencies are using it as a tactical tool to maintain their NPA ratio, obfuscating the true asset quality in the books.”

Axis Bank chief financial officer Puneet Sharma in the fourth-quarter earnings call said that given the macro environment, broadly the write-offs for Q4 have been on the retail unsecured side. The private sector bank’s write-offs rose 8% on-quarter and 62% on-year for the reporting quarter.

“If an exposure is 100% provided for on the retail and SME book, it gets written-off X months after the account is fully provided. So, the numbers within quarters are not judgemental, they are purely program-based and therefore a certain set of accounts would have been fully provided and written-off in this quarter,” Sharma had said in the call.

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Experts said it would appear that banks have been making additional provisions considering that their asset quality ratios, especially net NPA ratios, have been stable despite a rise in stressed loans or slippages in absolute terms. For instance, SBI’s net NPA ratio was down 6 basis points sequentially in Q4, while HDFC Bank’s net NPA ratio was down 10 bps.

“Net NPA levels are a reflection of post-provisioned stress,” pointed out Anil Gupta, senior vice-president and group head for financial sector ratings at Icra. “If these are at a relatively higher level, either in absolute amount or percentage terms, the market discounts the banks by giving them a lower price-to-book value or price-to-earnings multiple.”

Banks will, therefore, always prefer to write them off once they are provided, otherwise the NPA levels in absolute amounts or ratios will look elevated, Gupta toldMint.He added that in Q4 FY25, write-offs for private banks are likely to have largely been from unsecured loans because for secured loans, the write-off period is typically much longer—even up to three years.

Area of concern

The Reserve Bank of India, in its Financial Stability Report December 2024, had flagged that the sharp rise in loan write-offs, especially by private banks is an “area of concern” as it could be “partly masking worsening asset quality in this segment and dilution in underwriting standards”.

The report showed that during H1 FY25, loan write-offs by banks far exceeded those in the preceding two six-month periods. Per the RBI report, loan write-offs were significantly higher in retail loans compared to any other segment such as agriculture, services or industry sector loans. Within retail loans, the highest quantum of loans written-off were unsecured retail loans which typically include personal loans, microfinance and credit cards.

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As for public sector banks (PSBs), the government in December 2024 disclosed in Parliament that PSBs wrote off loans worth ₹42,035 crore in the first six months of FY25. SBI wrote off loans worth ₹8,312 crore, PNB worth ₹8,061 crore, Union Bank of India ₹6,344 crore, and Bank of Baroda ₹5,925 crore.

While banks do pursue recovery of bad loans even after they have been written off, the track record for recoveries from written-off accounts has been abysmal. Historically, loan write-offs for PSU banks have been driven by the corporate loan segment, and for private banks, more from unsecured or retail loans.

Banks usually follow-up and negotiate with borrowers and sometimes take a haircut or offer one-time settlements to borrowers to recover some money even after the account may have been written off. The amount recovered after a loan has been written off gets reflected in the profit and loss (P&L) statement of lenders.

To be sure, in the previous three financial years up to FY24, banks wrote off NPAs worth ₹5.5 trillion while recovery in written-off loans during the financial year as a percentage of such loans was 19.2% in FY22, 21.9% in FY23, and 27% in FY24, as per data presented by the government in the Lok Sabha on 17 December.

Further, lenders tend to focus recovery efforts on large ticket corporate or commercial loans rather than small ticket retail loans, where banks may find it cheaper to entirely provide for these loans than spend more time, manpower and resources in recovery activities and tracking down borrowers.

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Icra’s Gupta expects write-offs to remain high in FY26, especially in the first half of the year, given that a bulk of the incremental slippages being seen are from unsecured, retail, MSME and microfinance loans, for which banks typically have a faster write-off policy wherein they fully provide for these loans once overdue for 120-180 days.

“The special mention account (SMA) numbers are reflective of stress in the system, which we believe will continue for the next 1-2 quarters though it is not expected to dent private banks’ P&L materially,” Guha said, adding that stress could be more serious and the “pain could linger beyond two quarters” for the smaller banks given their tendency to cater to riskier borrowers.