Uday Kotak says won’t shy away from taking bolder bets, BFSI News, ET BFSI

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Veteran banker Uday Kotak has said his bank will not shy away from taking bolder bets and will shift its approach significantly to “one of greater aggression” even as he exhorted lenders to focus on sustainable growth and not get swayed by short-term quarterly results.

“The industry also needs to stop postponing the inevitable and kicking the can down the road. Upfront action with an eye on enduring, sustainable growth, not swayed by quarterly, short-term results is a must for the future of a healthy Indian financial sector,” Kotak, the managing director and chief executive officer of Kotak Mahindra Bank said in a message to shareholders in the annual report.

For the financial sector, the disproportionate importance of risk management has come to the fore, Kotak said, adding “The ability to price risks well and having superior underwriting skills is core to the success of a financial services institution.”

Kotak’s comments come at a time when the pandemic has triggered concerns around the asset quality, though the RBI has expressed some relief after seeing lower than expected impairments.

Kotak Mahindra Bank

Kotak said his bank remains focused on building a world-class financial services institution that will deliver long-term sustainable returns for all its stakeholders. For that, he said, the bank will shift its approach significantly to “one of greater aggression”.

“We will not shy away from taking bolder bets. We have a deep conviction in the India growth story and confidence in our risk management capabilities,” he noted.

“We believe the time is right to experiment more, concentrate on segments that we deem offer the best opportunities for returns, he said, reiterating that it will not deviate from its template of risk-adjusted returns.

“Today, we have a much lighter balance sheet and with sufficient capital in our hands, we are ready to grow substantially faster, but on our terms,” he said.

The bank will make higher investments in strengthening our digital and technology platforms and offerings, he said.

“What was once a support function to business, is now the epicentre around which our businesses will revolve,” he said.

India in the Never Normal

Kotak said the pandemic has changed the way consumers and businesses will function. “2020 was a year unlike any that we have seen. And while 2021 brings with it a fair degree of hope and optimism, I believe that we must embrace living in a world where the new normal and never normal coexist,” he said

According to Uday Kotak, India is currently at the same stage as it was in 2003 when it was at the cusp of an investment cycle, and that physical and social infrastructure will be the growth driver for the country.

The veteran banker said the country needs to invest significantly more and move closer to the 3 per cent of GDP mark in healthcare investments over the next 3-5 years.

We are transitioning to a world where ‘location’ will be increasingly irrelevant, but need to redouble efforts in education, Kotak said.

Stating that the future belongs to the educated and skilled, he said, “We have to make structural changes in our educational system to improve the quality of education imparted, invest in teachers and upgrade teaching infrastructure.”

When it comes to digital and technology, we have leapfrogged five years within the span of a year, and there will be some rebalancing when we revert to more in-person interactions, he said, making it clear that there is no going back completely.

Inclusive growth

Stressing the need to redefine priorities, he said, “Growth cannot be just for a select few. Inclusion is our responsibility as well as a business imperative. There will be a premium on sustainable growth. Growth that is inclusive and that takes into account the environment, is socially responsible and scores high on governance and ethics.

Doing good and doing well go hand in hand.”

He also acknowledged that the pandemic has created inequalities in society and sought interventions on this front.



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Special Long-Term Repo Operations: SFBs slow to borrow via RBI window

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Small Finance Banks (SFBs) seem to be in no hurry to borrow from the RBI’s special liquidity window , if one goes by the amount they have drawn since this facility was operationalised in May.

In the Special Long-Term Repo Operations (SLTRO) conducted by the Reserve Bank of India in May, June and July, SFBs cumulatively borrowed only ₹1,640 crore against the notified amount of ₹10,000 crore. They can still borrow the unutilised amount of ₹8,360 crore till October.

Industry experts attributethise to many SFBs having ample liquidity and the muted credit demand from the micro, small and medium enterprise (MSME) segment.

Some even cited constraints in terms of pledging SLR (statutory liquidity ratio) securities (investments made by banks in Government Securities/G-Secs and State Development Loans/SDLs) with the RBI to borrow three-year money via the special liquidity window. (SLR is the slice of deposits Banks have to invest in G-Secs and SDLs. Currently, it is at 18 per cent of deposits.)

In early May, the RBI had announced that it will conduct three-year SLTRO (one each every month from May through October) of ₹10,000 crore at the repo rate (4 per cent) for the SFBs. The unutilised amount is carried forward to the subsequent auction. This is to provide further support to small business units, micro and small industries, and other unorganised sector entities affected by the Covid second wave.

The SLTRO funds drawn by SFBs have to be deployed for fresh lending of up to ₹10 lakh per borrower. This facility is available till October 31, 2021.

“Though SLTRO is an excellent facility as it brings down our cost of funds and incentivises us to lend, liquidity-wise, most SFBs are currently comfortable. In our case, we have not found a direct use case for the facility at this point of time,” said a senior official of an SFB.

The official observed that if credit demand were to pick up, then instead of disposing off excess SLR securities that SFBs have, SLTRO may offer a better route to raise resources.

A senior executive with another SFB underscored that when a bank pledges SLR securities with the RBI, they become encumbered. Since the pledged/encumbered securities are deducted for the purpose of arriving at SLR, banks are mindful of maintaining SLR above the minimum threshold of 18 per cent of deposits.

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SEBI in talks with Centre on setting up of Repo Clearing Corporation

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Capital Markets regulator SEBI is in talks with the Central government on setting up of a Repo Clearing Corporation as part of efforts to develop a vibrant corporate bond market in the country, G Mahalingam, Whole-Time Member, has said.

Talks on with AMCs

Addressing an e-conclave on ‘Roadmap for economic Rebound’, organised by the industry body Assocham, Mahalingam said SEBI recognises that Repo market is one of the important pillars for having a vibrant corporate bond market. He highlighted that SEBI has been in talks with various asset management companies who are willing to bring the initial funding for Repo Clearing Corporation.

Also read: Why bonds have become attractive to large firms

“Once you have a good Repo Clearing Corporation, the repo market will gain lot of traction as credit risk vanishes out of the horizon and there will be a central counter party settlement,” he said. “SEBI is also in active discussion with the government on the budget announcement of introducing a new backstop facility for government purchase of corporate bonds that may fail,” he added.

Behind US, Korea, Brazil

Mahalingam noted that corporate bond outstanding in India was ₹36-lakh crore, which was about 18 per cent of the country’s GDP. “While this 18 per cent looks healthy, India is actually lagging far behind the US which has ratio of 124 per cent or South Korea where it is far excess of 50 per cent or Brazil where it it is close to 70 per cent,” he added. The development of our corporate bond market is therefore critical and has to play an important role for the rebound of the economy in a big way, he said.

Also read:A segmented banking system can boost credit

Mahalingam highlighted that there is a section of people who contend that development financial institutions (DFIs) are bound to come in a big way to help in economic recovery. “I am not sure if DFIs will come back but what needs to be developed in the country is the corporate bond market. We have been talking for some time on this. But I see flurry of activity in the last nine months where government has been playing a very proactive role with RBI and SEBI taking a good number of measures,” he said.

He stressed the need for both insurance companies and provident funds have to be a little forthcoming when it came to investing in corporate bonds. Most insurers are not prone to taking extra risk although there has been regulatory relaxations. “Insurance companies are well positioned to take risk. But they generally stick to AAA bonds and don’t go below that,” Mahalingam noted.

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RBI to HC, BFSI News, ET BFSI

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In a revelation, the Reserve Bank of India (RBI) has clarified that banks all over the country are witnessing increasing incidents of fraud due to their failure to adhere to its directives issued from time to time. In an affidavit submitted to the Nagpur bench of Bombay high court, the apex bank further disclosed that it doesn’t have the power to conduct investigations in banking frauds, nor does it have the machinery to do it.

The affidavit was filed while hearing a suo moto PIL for Rs25 crore losses caused to UCO Bank. Rajnish Vyas has been appointed as amicus curiae in the PIL. The embezzlement had taken place due to alleged forgery committed by a bank officer at its Wardha and Hinganghat branches. A division bench comprising justices Vinay Deshpande and Amit Borkar adjourned the hearing by six weeks.

Filed by RBI’s counsel SN Kumar, the affidavit added that as a regulator of the banking system in the country, it issued ‘Master Circular of Frauds’ to sensitize banks against scams and to have deterrent systems. “In spite of guidelines issued from time to time, it was observed that the frauds perpetrated in banks showed an increasing trend, mainly on account of non-adherence or improper implementation of circular directives issued by us. To enable the banks to have all current instructions in one place, a master circular incorporating all guidelines, instructions and directives on the subject was issued on August 1, 2001,” the affidavit mentioned.

Moreover, to enable the Government of India to have the required information on frauds, a suitable reporting system was introduced. Though the circular of March 22, 2002, has prescribed the period of reporting of frauds, it was realized that the banks aren’t following it scrupulously, the apex bank said.

At the RBI governor’s instance, the Central Vigilance Commission (CVC) has set up a high-level group to study incidents of fraud and suggest measures to prevent them. “This group observed that banks are not adhering to the time frame stipulated by RBI for reporting fraud cases. It has suggested that suitable penal action should be taken against defaulting banks. The banks are supposed to report frauds within a week of their detection and then a detailed report needs to be submitted in the prescribed format in the next three weeks,” the affidavit said.

The top bank added that to minimize incidents of fraud in the banking system, it has been making continuous efforts and regularly issuing circulars directing the banks to initiate appropriate action to contain them. “The Banking Regulation Act doesn’t empower RBI to conduct any investigations. The action may be initiated only after the offence is established by the law enforcement agencies. It’s mandatory for the banks to lodge a complaint of frauds with the police,” Kumar said.



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RBI imposes Rs 5 crore penalty on Axis Bank, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) on Tuesday said it has imposed a penalty of Rs 5 crore on Axis Bank for contravention of certain provisions of directions issued by the RBI, including on cybersecurity framework. The penalty has been imposed for “contravention of/non-compliance” with certain provisions of directions issued by the RBI. They include ‘Strengthening the Controls of Payment Ecosystem between Sponsor Banks and SCBs/UCBs as a Corporate Customer’; ‘Cyber Security Framework in Banks’; and ‘Reserve Bank of India (Financial Services provided by Banks) Directions, 2016′.

They also include ‘Financial Inclusion-Access to Banking Services-Basic Savings Bank Deposit Account’; and ‘Frauds-Classification and Reporting’.

The RBI said the statutory inspections for supervisory evaluation (ISE) of the bank were conducted with reference to its financial position as on March 31, 2017, (ISE 2017), March 31, 2018, (ISE 2018), and March 31, 2019 (ISE 2019).

The contravention of/ non-compliance with the directions has been revealed by – the examination of the Risk Assessment Reports pertaining to ISE 2017, ISE 2018 and ISE 2019; the report of scrutiny carried out by RBI in the backdrop of the incident relating to a fraud and related correspondence thereto; and the incident report submitted by the bank in June 2020 related to a few suspected transactions and related correspondence.

Notices were issued to the bank advising it to show cause as to why penalty should not be imposed on it for its failure to comply with the directions.

After considering the bank’s replies, oral submissions, and examination of additional submissions made by the bank, the RBI came to the conclusion that the charges of non-compliance with/contravention of the directions were substantiated and warranted imposition of monetary penalty, the central bank said.

The RBI, however, added the imposition of penalty is based on the deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.

Meanwhile, the RBI has also imposed a penalty of Rs 5 lakh on Alibag Co-operative Urban Bank Limited, Raigad, and Rs 1 lakh on The Mahabaleshwar Urban Cooperative Bank Limited, Mahabaleshwar, for deficiencies of regulatory compliance.



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RBI opens up RTGS, NEFT to non-banks in phases

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Authorised non-banks payment system providers including prepaid payment issuers, card networks and white label ATM operators will be eligible to participate in central payment systems like RTGS and NEFT in the first phase, according to the Reserve Bank of India (RBI).

By extending access to payment systems to more entities, the central bank is seeking to provide impetus to digital payments.

As per RBI’s notification on “access for Non-banks to Centralised Payment Systems” to authorised non-bank payment system providers (PSPs), non-banks include entities like PSPs and NBFCs that are regulated by Reserve Bank as also entities that are under the remit of other financial sector regulators like PFRDA, IRDAI, SEBI.

Currently, apart from banks, very few select non-banks have been given approval to participate in CPS so far. Banks have been providing the services to non-banks for their payment and settlement needs.

Also read: RBI’s digital index shows online payment is on the rise

“Direct access for non-banks to CPS lowers the overall risk in the payments ecosystem,” RBI noted, adding that it also brings advantages to non-banks like reduction in cost of payments, minimising dependence on banks, reducing the time taken for completing payments, eliminating the uncertainty in finality of the payments as the settlement is carried out in central bank money.

A non-bank getting direct access to CPS will be allotted a separate Indian Financial System Code (IFSC), can open a Current Account with the Reserve Bank in its core banking system (e-Kuber), maintain a settlement account with RBI, and get membership of Indian Financial Network (INFINET) and use of Structured Financial Messaging System (SFMS) to communicate with CPS.

Eligibility criteria

For access to CPS, non bank PSPs would require, among others, a valid certificate of authentication by the RBI under the Payment and Settlement Systems Act, 2007, networth of at least ₹25 crore, incorporation in India, adequate technical and system readiness including cyber resilience and compliance with local payment data storage requirements.

Also read: Mastercard to file an independent audit report

“Entities incorporated outside India shall empower their local offices to carry out all operations in respect of CPS, but the responsibility for all operations and management of any contingency, including settlement obligations, shall remain with the foreign parent institution, which has taken authorisation as PSP,” the RBI further said.

Nature of transactions that can be executed will depend upon the type of membership approved for RTGS while some categories of PSPs will be permitted to participate in NEFT also.

RTGS/ NEFT customer payments can be initiated by PPI issuers to merchants/ payment aggregators; WLA operators to agencies handling ATMs; and Full-KYC PPI customers to load the PPIs from their bank account.

RTGS inter-bank transfers can be initiated by non-bank PSPs to maintain sufficient balance in their escrow account with member bank/s based on net debit or credit position; and WLA operators and PPI issuers to other member banks/ non-banks.

Also read: Cryptocurrency, CBDC and the RBI Act

RBI said card networks will not be allowed to use the RBI current account for their settlement guarantee and related activities. Non-banks would be expected to submit applications for membership to CPS to the RBI.

“Reserve Bank shall endeavour to complete the process of scrutinising the applications, that are complete with all required documents, within 60 days of receipt,” it said.

The RBI had in April this year proposed to enable regulated payment system operators to take direct membership in Central Payment Systems such as RTGS and NEFT.

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RBI imposes ₹5-crore monetary penalty on Axis Bank

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The Reserve Bank of India has imposed a monetary penalty of ₹5 crore on private sector lender Axis Bank.

The penalty is for contravention of and non-compliance with certain provisions of directions issued by RBI on ‘Strengthening the Controls of Payment Ecosystem between Sponsor Banks and SCBs/UCBs as a Corporate Customer’, ‘Cyber Security Framework in Banks’, ‘RBI (Financial Services provided by Banks) Directions, 2016’, ‘Financial Inclusion- Access to Banking Services – Basic Savings bank Deposit Account’ and ‘Frauds – Classification and Reporting’.

“The penalty has been imposed in exercise of powers vested in RBI under the provisions of section 47 A (1) (c) read with section 46 (4) (i) of the Banking Regulation Act, 1949 (the Act),” the RBI said on Wednesday, adding that the action is based on the deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.

The RBI had conducted statutory Inspections for Supervisory Evaluation (ISE) of Axis Bank with reference to its financial position as of March 31, 2017, March 31, 2018 and March 31, 2019.

The examination of the Risk Assessment Reports pertaining to ISE 2017, ISE 2018 and ISE 2019, the report of scrutiny carried out by RBI in the backdrop of the incident relating to fraud and related correspondence, and the incident report submitted by the bank in June 2020 relating to a few suspected transactions and related correspondence, revealed contravention of or non-compliance with the directions of RBI.

Axis Bank was then issued notices to show cause as to why penalty should not be imposed on it for its failure to comply with the directions, the RBI said.

After considering the bank’s replies to the notices, oral submissions made during the personal hearing and examination of additional submissions made by the bank, RBI came to the conclusion that the charges of non-compliance with and contravention of the RBI directions were substantiated and warranted imposition of monetary penalty on the bank.

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Foreign banks lose card market share, BFSI News, ET BFSI

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Foreign banks have seen their share of credit cards come down by a third in the last three years. In terms of value of transactions, their share has halved as that of private and public sector banks have grown.

According to data released by the RBI, foreign banks had 57 lakh credit cards outstanding as of March 2018. At that time, there were 3.8 crore credit cards in India, which gave the multinationals a market share of 15%. However, despite losing market share, the foreign banks had significant clout because of the higher value of transactions by their customers who spent more than the average cardholder. In 2018, the foreign banks had monthly card spends of Rs 10,380 crore — a 23.4% share.

Fast forward to March 2021, when the total market expanded to 6.2 crore cards while the number of cards issued by foreign banks stood at 66 lakhs, reflecting a market share of nearly 11%. It is not just in the number of cards that the multinationals have been losing ground. In terms of value of transactions too, foreign banks have a market share of 11.8% in the Rs 72,372-crore monthly volume.

While private banks have consolidated their market share in the card space, increasing their share from 63% to 66%, public sector banks have grown from 21.6% to 23.2% in three years. State Bank of India accounts for almost 80% of all public sector banks. Overall, SBI has 19% of the credit card market, which is still behind the 24% share of HDFC Bank.In global banks, four dominate the credit card space — Citi, Amex, StanChart and HSBC. These MNC banks have also played a pioneering role in the card business in India and they dominated the market in the ’90s. Citi’s decision to exit its retail business in India could further reduce share of foreign banks, should the portfolio be taken by a local player. Additionally, American Express faces a freeze on on-boarding new customers due to data-localisation norms even as more private banks are stepping in.

In 2018, American Express had 3% of the credit card market in terms of number of customers. But it accounted for 10% of all spending by credit card customers in India. In 2021, their share of cards shrunk to 2.5%, while the share of spending declined to 4%. Citibank, which had a 7% share of cards and 9% share of spend, saw these fall to 4% and 6%, respectively. HSBC has held ground better than others with a market share of 1.4% as of March 2021 (1.5% in ’18) and retaining its 1% share of total spend.



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RBI’s communication key to handling excess liquidity, says StanChart’s Sahay, BFSI News, ET BFSI

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NEW DELHI: Over the last few weeks, a conundrum has resurfaced for the Reserve Bank of India — how to keep the liquidity surplus in the banking system from ballooning past a point that would be difficult to tackle in the future.

Standard Chartered Bank‘s head of economic research – South Asia, Anubhuti Sahay, is of the view that while it is important to permit a surplus of liquidity, it is equally important that “unnecessary excesses” are mopped off.

“I would suggest the following to the RBI Governor. The stock of liquidity if it becomes too large can become very difficult to absorb later on. Thus it is important that timely action is taken to ensure that liquidity remains in surplus, allows monetary policy transmission but unnecessary excesses are mopped off,” she said.

At present, liquidity in the banking system is estimated to be around 6 lakh crore rupees while the government is expected to be sitting on around 4 lakh crores, taking the core liquidity above 10 lakh crores.

Liquidity in the banking system in seen rising in the Jul-Sep quarter because of redemptions of Treasury Bills worth around 1.7 lakh crores, treasury officials said. In addition, the RBI is regularly infusing durable liquidity through its bond purchases under the recently announced ‘Government Securities Acqusition Programme’.

For the current quarter, the central bank has committed bond purchases worth 1.2 lakh crores.

From the perspective of its bond purchases there is little that the RBI can do because it is necessary for the central bank to be an active buyer of gilts and anchor sovereign borrowing costs at a time when the government borrowing programme is huge.

Moreover, the surplus liquidity conditions maintained by the RBI have had a significant role to play when it comes to keeping credit costs in the economy low at a time when the coronavirus crisis has crippled demand.

Sahay said that the RBI’s communication to markets would play a key factor in how the central bank manages episodes of a large accretion to liquidity.

In January 2021, markets were spooked when the RBI unexpectedly announced variable rate reverse repo operations as the step was taken as a precursor to policy normalisation.

At the time, the liquidity surplus was comparable to what it is now. The RBI has since, several times assured markets that it is not taking any steps to commence policy normalisation.

“It is important that measures are announced on a regular frequency while clarifying that these are not measures towards policy normalisation,” Sahay said.



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Number of unique wilful defaulters rose by 286 in pandemic, BFSI News, ET BFSI

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The number of wilful defaulters has increased from 2,208 to 2,494 at the end of March 31, 2021, Finance Minister Nirmala Sitharaman informed Parliament on Tuesday.

As per RBI data on global operations, during the last three financial years, public sector banks (PSBs) have effected recovery of Rs 3,12,987 crore in non-performing assets (NPAs) and written-off loans.

“RBI has further apprised that the total number of unique wilful defaulters reported by PSBs was 2,017 as on March 31, 2019, 2,208 as on March 31, 2020 and 2,494 as on March 31, 2021,” she said.

Bank NPAs

Sitharaman said that the RBI has apprised that as per data reported by banks to the Central Repository of Information on Large Credits (CRILC), the total funded amount outstanding of borrowers whose sector code is private and whose loans are classified as NPAs in the PSBs as on March 31, 2019, March 31, 2020, and March 31, 2021, is Rs 5,73,202 crore, Rs 4,92,632 crore and Rs 4,02,015 crore respectively.

Banks are required to take steps to initiate the legal process, wherever warranted, against the borrowers or guarantors for recovery dues, she said. They may also initiate criminal proceedings against wilful defaulters, wherever necessary, she added. In reply to another question, the Finance Minister said public sector banks have done a write-off of Rs 1,31,894 crore during 2020-21 as compared to Rs 1,75,876 crore in the previous year. As a result of the government’s strategy of recognition, resolution, recapitalisation and reforms have led to decline in gross NPAs as a percentage of total advances to 9.11 per cent as of March 31, 2021, from 11.97 per cent on March 31, 2015.

Top 100 wilful defaulters

The total size of the top 100 wilful defaults rose 5.34% in FY20 from Rs 80,344 crore as of March 2019.
Mehul Choksi-owned Gitanjali Gems topped the wilful defaulters’ list with Rs 5,693 crore dues, followed by Jhunjhunwala brothers’ REI Agro with Rs 4,403 crore and Jatin Mehta’s Winsome Diamonds & Jewellery with Rs 3,375 crore.

The top 10 wilful defaulters include another jewellery maker Forever Precious Jewellery, and Vijay Mallya’s Kingfisher Airlines Punjab National Bank had the highest exposure to Gitanjali Gems with Rs 4,644 crore of non-performing assets (NPA) as of March 2020. PNB also had Rs 1,447 crore exposure to Gili India and Rs 1,109 crore to Nakshatra Brands.

Write-offs

State Bank of India had Rs 1,875 crore dues from top 10 wilful defaulter ABG Shipyard with the bank writing o the entire amount. Uco Bank had Rs 1,970 crore exposure to REI Agro with half of it being written off.

Write-offs are accounting entries for shifting NPAs from the active balance sheet to off-balance sheet accounts. These are backed by 100% provision and therefore any recovery from these accounts adds to net profit.
RBI collects credit data from banks monthly, with data on defaults being collected on a weekly basis. The regulator has mandated banks to provide fully against NPAs older than four years and allowed to write these old NPAs.

The reduction in NPAs during FY20 was largely driven by write-os, RBI had said in its report on Trend & Progress of Banking in India. Banks’ total gross NPA reduced to 8.2% at the end of March 2020 from 9.1% a year earlier.



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