Indian banks wrote off more than Rs 2.09 lakh crore in bad loans in the financial year that ended in March, The Indian Express reported on Monday, citing a response from the Reserve Bank of India to a Right to Information request.

In the last five years, the banks have written off Rs 10.57 lakh crore in bad loans, the central bank said.

What are bad loans and why do banks write them off?

A loan turns bad and is classified as a nonperforming asset, or NPA, when the principal or interest payment is overdue for 90 days. In the accounts books of the bank, however, an NPA is still an asset. This is where the need for writing off a bad loan comes into the picture.

Writing off a bad loan allows a bank to move an NPA out of the assets side in its books and list it as a loss. This helps the bank keep its books clean as the ratio of gross NPAs to total loans given declines.

However, writing off a bad loan does not mean the bank has given up hope of recovering the money. According to an RBI circular, a “technical write off” does not “entail any waiver of claims against the borrower and thus the lenders’ right to recovery is not undermined”.

This essentially means that the bank still holds the right to dilute the borrower’s collateral and employ other means to recover any loan that has turned “bad”.

How has this policy worked out for Indian banks?

There is good news and bad news.

By writing off bad loans, Indian banks reduced their gross NPAs in March to a 10-year low of 3.9% of the total loans given, according to The Indian Express. From Rs 10.21 lakh crore in the financial year 2017-’18, gross NPAs of Indian banks had fallen to 5.5 lakh crore by March.

This may suggest that the financial health of Indian banks is getting better, but the picture is not that rosy.

In its RTI reply to The Indian Express, the Reserve Bank of India said that when it comes to recovering NPAs, the banks have got back only Rs 1,09,186 crore of the Rs 5,86,891 crore in written-off loans in the last three years. This means that while the banks may have cleaned their books, they have been able to recover only 18.6% of the loans they have written off in that time, the Express reported.

Breaking down the numbers further, the total cost of defaulted loans – NPAs that have been written off but not recovered – stood Rs 10.32 lakh crore. If this number is taken into consideration, then the NPAs of Indian banks amount to 7.47% of their total lending as against the 3.9% reported by them to the Reserve Bank of India.

Also read: Modi government under fire over new rules allowing wilful defaulters to settle loans with lenders