What is a loan write-off and how it is different from loan waiver?

A loan EMI has two components -- principal amount and interest. The interest amount depreciates and the principal contribution increases as borrowers pay EMIs. In case a borrower fails to repay the loan, banks at times write off the loan or waive off the loan. Here, we will tell you how a loan write off is different from a loan waiver:

What is Loan Write-Off?

Loan Write-Off is when the loan is no longer counted as an asset by the bank. In simpler words it is the amount of loan that is written off by the banks, thus reducing the level of non-performing assets (NPAs) on its books.

NPA is a non-performing asset. Reserve Bank of India defines NPA as any advance or loan that is overdue for more than 90 days.

“An asset becomes non-performing when it ceases to generate income for the bank,” said RBI in a circular form 2007.

Since the loan account is not closed in write-off, the right to recovery of the amount is not waived by the lender or the bank. The bank or lender can try to recover the loan amount from the loan defaulter. A loan is a write-off to minimise tax liabilities.

In a loan write-off, a bank may confiscate collateral given by the borrower until the repayment is done or may also auction off the collateral to recover the loan amount.

In the last 5 financial years, banks have written off loans' worth about Rs 10 lakh crore, according to a PTI report. During 2021-22, the write-off amount came down to Rs 1,57,096 crore compared to Rs 2,02,781 crore in the previous year, Minister of State for Finance Bhagwat K Karad said in a written reply in Rajya Sabha, according to a PTI report.

What is Loan Waiver?

A loan waiver is when the loan is waived off completely by the lender. In simpler words, the borrower is freed from the obligation of paying the loan back i.e., free from a particular debt.

When a loan is waived off, the bank can not take any legal action against the borrower to recover the amount from the borrower.

In the case of a waive-off, if the borrower has offered any kind of collateral to the bank, the ownership papers are returned to them.

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