SBI writes off 7000 Crore loans owned by defaulters including Mr. Vijay Mallya’s 1200 Crore. Does this mean that Vijay Mallya and other defaulters need not pay their dues anymore? Before jumping to any sort of conclusion, let us all give 2 minutes of our time to understand why banks write off bad loans and is it anyway related to demonetization of 500 and 1000 INR currencies.
Why do Bank Write off Bad loans/Debts
Banks writes off bad loans on regular intervals. When a bank writes off a bad loan, it means the bank has failed to recover the amount from the defaulter till that particular day. They mention it as loss in their balance sheet, so that the taxable amount gets reduced, which is actually the main goal behind any write offs. By writing off bad loans, the actual profit made by the company (here bank) is reduced. From the overall revenue generated in a particular year, the ‘write off amount’ and all other expenses are deducted and then the actual profit is calculated. Based on the earned profit/income, tax is calculated.
Banks maintain a separate portfolio of the defaulters. Bank still holds the same right to collect the amount from the defaulters or take action against the breach of agreement between two parties.
Banks will not collect Money from Defaulters like Vijay Mallya anymore – NOT TRUE
Writing off bad loans does not necessarily mean that the banks will stop putting any effort to collect the due amount. A defaulter has to pay even if the bank writes off his loan. After collecting the amount from the defaulter, they will add it to that year’s balance sheet.
Why would you believe me ? A similar news was reported in the month of February after which RBI published a clarification mentioning that the news item lacked right perspective. Read the clarification here.
Demonetization of 500 and 1000 INR notes is to help defaulters like Vijay Mallya – RUBBISH
Please note, writing off 7000 Crore bad loan is no way related to the demonetization of Indian currencies. Some people are trying to relate both the things to prove their point that the banks (and ruling Government) are trying to collect common man’s hard earned money and sparing the wilful defaulters by writing off their bad loans. But, this is not true.
Had they known anything about by banks write off bad loans, they would not have shared such things. Do not pay any attention on the rumors that people are trying to spread. Forgive them as they may not know the right reason. Our duty is to educate them properly. Share this with them and help them learn a new thing today. All is well.