1.25     Query

Write-off of bad debts by a bank

1. It is proposed by a subsidiary of a nationalised bank that the debts which become “badly irrecoverable” in the opinion of the bank should be written-off against the respective provisions. There are certain cases of debts where legal opinion has been obtained on the basis of which the management of the bank has arrived at a conclusion that these debts have finally become bad and irrecoverable. In view of such irrefutable evidence, according to the querists, there seems to be no other option except that the final accounts of the bank reflect and represent “True & Correct” view of its state of affairs.

2.In this context, the querists have pointed out that, in past, the bank had been accumulating bad debts under the classification of “Protested & Sticky Debts”, while at the same time, provision for the write-off of such debts was being made year by year in the “liabilities and Provisions” side of the balance sheet of the bank. The querists feel that it would be advisable that the debts which have really become bad and irrecoverable must be eliminated from both sides of the balance sheet i.e. debts as assets and provisions as liabilities. It is proposed to introduce this change from the year 1986.

3.The querists have sought the opinion of the Expert Advisory Committee as to whether such a course can be adopted by the bank and also whether it will be legal and advisable to pursue such a course of action.

                                                                               Opinion                                  September23,1986

 1.  The Committee notes that Form A of the Third Schedule to the Banking Regulation Act 1949, which prescribes the form of balance sheet of a bank, requires that the advances should be shown net of provision for bad and doubtful debts. In view of this, the provision for bad and doubtful debts is neither shown on the ‘Liabilities’ side of the balance sheet nor such debts are included in advances on the ‘Assets’ side of the balance sheet of a bank. In view of this, the committee is of the opinion that actual write-off of bad and irrecoverable debts against the provision for bad and doubtful debts does not affect the true and fair view of the state of affairs of the bank as reflected by its balance sheet.

2.Regarding the write-off of bad and irrecoverable debts against the provision for bad and doubtful debts, the Committee is of the opinion that, from the accounting point of view, if the management of the bank is satisfied about the irrecoverability of debt, keeping in view the circumstances of each case (e.g. the debtor has becomes insolvent or has gone into liquidation or has deceased), the bank can write-off the debt. The Committee however wishes to point out that this is subject to specific directives of the Reserve Bank of India/legal provisions under Banking Regulation Act and/or other related laws in this regard.

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