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What is a loan Write-Off?

Context:

Banks wrote off more than Rs 10 lakh crore in loans over the last five years, according to RBI data obtained under the Right to Information (RTI) Act.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. What is a loan write-off?
  2. Why do banks resort to write-offs?

What is a loan write-off?

  • Writing off a loan essentially means it will no longer be counted as an asset.
  • By writing off loans, a bank can reduce the level of non-performing assets (NPAs) on its books.
  • An additional benefit is that the amount so written off reduces the bank’s tax liability.
Why do banks resort to write-offs?
  • The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very low chance of recovery.
  • The lender then moves the defaulted loan, or NPA, out of the assets side and reports the amount as a loss.
  • After the write-off, banks are supposed to continue their efforts to recover the loan using various options.
  • They have to make provisioning as well. The tax liability will also come down as the written-off amount is reduced from the profit.
  • However, the chances of recovery from written-off loans are very low  which raises questions about the assets or collateral against which the banks lent funds to these defaulters.

-Source: Indian Express


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