Every loan, whether secured or unsecured, is supposed to be repaid fully at the end of the term. Still, there may be moments when you are unable to repay. Lenders classify these as non-performing assets or NPAs.
NPAs represent bad loans. What takes place if a financial institution has a bad loan or a non-performing asset? You have certainly watched news stories recently concerning non-performing assets (NPAs) and the way they have been written off or waived.
Loan write-off and loan waive-off are financial debt matter-related words applied to refer to bad loans. Although these might seem similar, they both have unique purposes that differ from one another.
Writing off loans does not relieve the recipient of his or her obligation to repay the amount. This continues to exist in the lender’s account, which means they can ask for reimbursement in future times. The financial institution may confiscate the applicant’s collateral up until the loan is repaid.
The security deposit may be marketed at an auction to get the loan sum back. The financial institution may also pursue legal action. Otherwise, they can sell delinquent loans to outside collection agencies.
On the other hand, a loan waive-off releases the recipient of the loan from reimbursement. In this scenario, the banking organization or financial firm admits that they are unable to recover the debt transferred to the client. Unlike loan write-offs, this practice frees the applicant from the duty to repay the debt. Furthermore, the banking institution does not collect payments or pursue legal action against consumers.
To comprehend the difference between write-off and waive-off, you need to learn the definitions of loan waive and write-off.
What Refers to a Loan Write-Off?
Suppose Mr. Akash obtained a quick loan of Rs 6 lakhs from a certain bank for 2 years. He had been making payments for his EMI for four months. However, after that time, he found himself incapable of making the repayment and ceased repaying the EMI without prior notice to the lender in question.
Despite frequent follow-ups, there is no reimbursement from the borrower’s end. Eventually, the loan’s term ends.
The financial institution has used every legal option to convince Mr. Akash to return the money, but all in vain. At times like these, the financial institution considers writing off the loan.
A loan write-off occurs when a financial institution decreases the initial value of the borrowed money because it isn’t always possible to reclaim the entire amount.
Yet, the borrowing party is still required to repay the personal loan because it continues to be a recoverable element in the lender’s records of accounting.
What Takes Place if a Debt is Written Off?
When a financial institution writes off a loan, this does not indicate that they cannot collect it through legal methods. It is merely a technique of demonstrating that the customer is not now repaying the loan. But there is a possibility that it may be collected later.
The Advantages of Write-Off
- One advantage of a loan write-off is that if the funds can be recovered by the financial institution, it counts as the profit for the year in which the recovery is completed. Writing off a bad loan is not an indication that the banking institution will forfeit its legal claim to retrieve the balance that is due. Therefore, any recovery earned on a bad loan after it has been written off is regarded as profits for a financial institution in the recovery year.
- If the applicant provided collateral for the loan, the financial institution has the full legal right to seize it. They can recover the funds, and record it on their accounting records.
- This is a frequent action taken by financial institutions to clean up their balance sheets.
- Whenever a loan is written off, the financial institution is eligible for tax relief.
- It is formally written off in the books of accounts. However, lenders remain entitled to lawfully request that the borrowing party repay the debt and generate revenues.
What Defines a Loan Waive-Off?
Here, look into the situation of Mr. Biplab. He took out a short-term financial loan of Rs 3 lakh from a particular bank for two years. He systematically repaid four EMIs. However, during the payback period, he experienced an unusual drop in his business and decided to file for bankruptcy.
Whenever an applicant cannot repay the amount owed because of monetary issues, the lender may choose, in rare circumstances, to renounce or give up any right they have on the loan. This indicates that the financial institution will not require the borrower to return the debt.
A loan waiver will only be issued once the financial institution has conducted inquiries. In the scenario above, Mr. Biplab is considered to be bankrupt.
As a result, the bank in question agrees to forgive his outstanding loan.
What you must understand is that a bank loan waiver is a government-sponsored offering that primarily benefits farmers.
A loan waiver, or waive-off, is essentially a selective provision. This is frequently granted to farmers who have been experiencing difficult situations such as poor monsoons, unusually bad weather, quakes, tsunamis, or natural disasters that have hampered their crops and rendered them incapable of repaying the debt.
Loan waivers provide farmers with financial assistance in events beyond their control by relieving them of the obligation of repaying debt. In India, government officials typically request debt waivers for priority sectors such as agriculture.
Loan Waive-Off Versus Loan Write-Off
| Waive-Off | Write-Off |
| The applicant is not required to pay the remaining balance on the loan. The person is released from the responsibility of returning the remaining amount of the loan. It signifies that the lender has completely terminated the loan recovery. | The financial institution will write off the loan to ensure a clean balance sheet. However, this does not imply a conclusion about recovering loans. |
| The banking institution will take no legal steps against the borrower in this case. The financial obligation comes to an end. | The loan is not cancelled by the bank or lender. They will seek legal assistance in recovering the overdue loan amount. |
| If a borrower has provided any security whatsoever in exchange for the borrowed funds, it will be returned to them. | If the applicant fails to pay off the loan, the banking institution will confiscate and auction off any assets that were provided. |
| Loan waivers are a government-provided service that assists farmers in the event of natural disasters that cannot be avoided. | Loan write-offs are a routine practice used by financial firms and banks to maintain an accurate balance sheet and reduce tax burdens. |
| It is a voluntary measure taken by a financial institution with the cooperation of the government. | It is a compulsory practice for banking and financial institutions. |
Loan write-offs are often known as “charge-offs.” This implies removing a bad debt from your lender’s balance sheet while minimizing tax liabilities. It is critical to understand the distinctions between the phrases described above so that you can manage all kinds of loans effectively.
Loan waive-off is another word that is frequently used when discussing bad loans. A lot of people get confused between loan write-offs and loan waive-offs because the two options are nearly identical. In a loan waiver, the borrower is officially excused from repayment.
It signifies that the lender or bank will have no prospect of retrieving the loan from the borrowers. It simply refers to the procedure of relieving the applicant of the responsibility of repaying the loan and ensuring that the lender will not recover any funds. The banking institution will not collect dues from defaulters, and no legal action will be initiated against them.
Benefits of a Loan Write-Off
Writing off a debt means that it is no longer considered an asset. By writing off a debt, a banking institution may lower the level of nonperforming assets (NPAs) on its records. Additionally, the write-off decreases the bank’s tax burden.
Benefits of Loan Waive-Off
Waiving off indicates that the loan account will be terminated. Additionally, it prevents the lender from pursuing charges against the borrower to recover the full loan amount. It is a legal process that also reduces tax liability.
When is it Beneficial to opt for a write-off or waive-off?
There is no specific response to this question because it is dependent on the individual circumstances.
Still, in general, a write-off or waive-off tends to be suitable when:
- There are huge financial benefits to be realized.
- The write-off or waive-off will have no impact on other individuals or businesses.
- The write-off or waivers are permitted under the applicable rules and regulations.
- The write-off or waiver complies with the business’s ethical requirements.
- Before using a write-off or waiver, it is critical to consider all of the potential impacts, which can be both beneficial and bad.
Bottom Line
The terms “write off” and “waive-off” in finance, particularly loans or debts, refer to actions by creditors or debtors. These may not be collectible or be considered uncollectible. Although these terms are sometimes used interchangeably, they have different implications and potential problems.
The primary distinction between write-off and waive-off is that the former is a step taken by the financial institution when loan recovery is uncertain. At the same time, the latter is assistance provided by both the financial institution and the government. Customers who get their loans waived are no longer required to pay back their obligations.