SBI write off Vijay Mallya's loan: Know what it actually means

 

The recent development in the Vijay Mallya's life is that SBI has written off the various loans worth more than ₹7,000 crore owned by above 60 wilful defaulters that include the loans of Mallya-promoted Kingfisher Airlines, government, and the banks. 

 

At a time, when every commoner is either standing in queues to withdraw cash or counting pennies to survive the cash crunch situation, this seems upsetting, unfair, and a decision that will adversely affect the taxpayers. 

 

When PM Narendra Modi clearly declared that the demonetisation is required to recover black money, counterfeit currency and stop corruption, this SBI move seems against the economy of the nation. 

 

However, the loan being written off does not mean loan has been waived off. This is what exactly, writing off a loan means:

 

What loan 'write off' means: 

 

The banks maintain a financial statement called, balance sheet, that needs to be clear in status meaning showing the real-time valuation of the bank's finances. To clear the balance sheet, banks use the tool Advance Under Collection Accounts (AUCA) approved by Reserve Bank of India (RBI). 

 

By transferring accounts to a specified AUCA, banks can reduce the non-performing assets (NPA) which are debts or loans that are in default or behind the scheduled payments of principal amount or the interest. In short, if you do not repay a loan for 90 days it becomes NPA.  

 

After exhausting all possible means to recover a loan, a bank considers it as a bad load and transfers it to AUCA by writing it off, and this does not mean waived off. The process to recover the amount of the loan persists. 

 

A bad load is also a way of putting a person's credit history in open so that going forward he can't get a loan and is forced to repay for the bad loan. Also, only one quarter is left till the next budget, and this write off is necessary to keep the financial information realistic. 

 

Once a loan is written off or transferred to AUCA, there is a structured mechanism bank must follow and also, loan account is monitored closely. In short, the recovery process does not end, and the defaulter is not excused from repaying the loan.