Lending before COVID-19 was sub-par: This is what write-offs across APAC convey

Right from the start of the pandemic, rating agencies and experts had warned that bad loans will see a surge – a fact that holds true when incomes get truncated in the face of a once-in-a-century pandemic.

However, along with the expected surge in stress in the assets of the banks, the write-off of bad loans has also surged after the pandemic.

Before addressing the devil in the details, let us comprehend what does a write-off of a loan mean? A write-off is an accounting jargon for the official recognition in the financial statements of the lender that a borrower's asset has become worthless for them. In normal circumstances, to write off a loan, the bank must, usually, provide 100% provision for that loan and there are no realistic prospects of recovery. These loans are transferred to the off-balance sheet records.

What this means, in simpler terms, is that these bad loans had caused stress in the books of the bank even before the onset of the pandemic. After the stress, the banks started creating provisions for these bad loans – albeit on expense of their profitability. After they were provided for, the bank started to write them off. If anything, the pandemic had little impact on these write-offs.

Now let’s look at the numbers in the Asia Pacific region – stating from the region’s largest economy, China. Data from China’s central bank  – People’s Bank of China (PBoC) – data shows that in 2019 the total loans written off in the country stood at CNY41.30 trillion (US$6.37 trillion). This number jumped by 32.4% to CNY54.9 trillion (US$8.47 trillion) in 2020 – the year when country was the first to be hit by the COVID-19 pandemic. Till now in 2021, the PBoC pegs the loan write offs at CNY32.8 trillion (US$5.08 trillion). If this trend continues, the annual write offs in China could breach the US$10-trillion mark in 2021, with a growth of over 20%.

The cases have not been much different in other major economies like Japan, India and Australia. What does this tell us in a nutshell? – the quality of debt during the go-go years after the Great Recession, when the bankers had started lending recklessly. In some cases, this lending was clearly done with intentions, under the scanner of the investigating authorities in various countries.

Let’s take this scenario to understand this situation. In March 2020, in India, the Nifty50 crashed by 25%, 10 percentage points or 35% lower than the Nifty Banks. There was bloodbath in bank stocks. Reason? India’s fourth largest private lender YES Bank had collapsed and subsequently bailed out on 5 March 2020 – just before the country was hit by the COVID-19 pandemic. The bank had collapsed due to severe liquidity crunch, arising from bulging stress in its book due to irregularities in the lending process between 2014 and 2018.

So, to put it in a nutshell, the pandemic has only accentuated the underlying legacy problem. The problem with most bankers, as on date, is the fact that in times of booming economy, they focus on nothing other than bottomline. The risk appetite increases so much that it clouds the bankers’ prudence. Increasing the loan book seems to become the only stated goal of bankers. Not to forget, it was reckless lending that led to the Great Recession of 2008. Things should have changed from there. Indeed, things did change. But mostly on the regulatory side. Call it strategic myopia of the banking industry, greed overshadowing prudence continued even post-2008.

However, there are exceptions to this. Jamie Dimon, the Chief Executive Officer of JP Morgan Chase – the largest of Wall Street banks – has been constantly reminding the bankers about prudent lending. No doubt, JP Morgan has survived the ups and down of the American financial system.

Yet another example of this has been Asia’s richest banker Uday Kotak – the CEO of Kotak Mahindra Bank. Some of his rivals might try to poke fun at him for his risk averseness and call his bank a “payday loan business”. But Mr Kotak, over the years has built one of the most valued banks in India and APAC region. His bank focuses on the key middle class of India – rather than top of the pyramid, risky corporate borrowers. He seems to focus on margins, then on volumes and in this process, he mitigates the risk by notches.

By no means am I saying that the banks should not lend. The banks should lend – it is their primary source of income. But banks should lend carefully, very carefully. Reckless lending dents the trust in the banking system. And trust is all that pillars the entire financial system.