A loan write-off is not the same as a loan waive-off. However, both these terms apply when there are bad loans involved. What are they? When borrowers cannot pay their loan due for whatever reason, lenders term them as bad loans or Non-Performing Assets (NPAs).
There are two ways in which lenders deal with NPAs or bad loans. They either write them off or waive them off. Doing this helps lenders balance their ledgers.
Before understanding the difference between loan write-offs and waive-off, let’s understand them with the help of the following examples.
What is a Loan Write-Off?
Not sure what happens when a loan is written off? Consider the example of Mr Mehta. He availed of a personal loan of Rs. 10 lakhs for 3 years from an NBFC. He pays his EMIs diligently for 8 months, after which he suddenly stops without informing the lender. The NBFC now starts following up with Mr Mehta, but he doesn’t repay, and the personal loan tenure comes to an end.
Sure, the NBFC deployed all legal means to recover the loan but failed to do so. In the meantime, they realise that Mr Mehta might pay off his loan if it were a lower amount. As a result, they reduce the loan’s original value as they may be able to recover the reduced amount in full. This reduction of the total loan amount is called a loan write-off.
Know that Mr Mehta is still liable to pay his new personal loan amount, and his loan is shown as a recoverable asset in the NBFC’s books.
Advantages of a Loan Write-Off
By undertaking this activity, lenders get the following benefits:
- Lenders become eligible for a tax rebate on the total loan value by writing them off.
- Not all borrowers use up their entire credit limit. They borrow the amount they need and pay interest on actuals. By writing-off loans, lenders don’t need to release the remaining limit to defaulting borrowers. Doing this helps them release funds previously blocked for a borrower. They can use these to provide loans to others in need or for their business.
- Lenders don’t lose the right to recover outstanding loans even after writing them off. They can use the means necessary to recover the full or partial loan amount.
- Writing-off loans help lenders maintain a clean and updated balance sheet.
What is a Loan Waive-Off?
To understand what a loan waive-off is, consider Mr Chaudhary’s example. He borrowed a personal loan of Rs 5 lakhs for 2 years to purchase equipment for his farmland. However, he faced a substantial loss due to unforeseen circumstances and had to declare bankruptcy.
Mr Chaudhary’s inability to repay his personal loan due to a financial impediment led the lender to waive off his loan. Meaning they chose to relinquish the loan entirely. Giving up any claim on a loan happens only in exceptional circumstances. Know that mostly farmers have a chance at loan waive-offs with the government’s support.
Loan Write-off Vs Loan Waive-Off
Now that you know what is loan write-off and waive-off, it’s time to understand the difference between the two.
| Differentiating Parameter | Loan Write-Off | Loan Waive-Off |
| Repayment | A lender writes off a loan to equalise their balance sheets. It does not mean the loan is cancelled. The loan account is active, and lenders hope to make a recovery at a later date. | Here, a lender gives up all claims to a loan amount. It is a complete cancellation of a loan. This means the borrower is free from their debt. |
| Recovery | What happens when a loan is written off is that lenders may pursue recovery with the help of a legal entity. They can do this since the loan is not closed. | Lenders cannot pursue the loan amount once it’s waived off. They cannot seek assistance from any legal entities or third-party recovery agents to collect outstanding funds. In this case, the loan is closed. |
| Collateral | A lender has the legal right to retain any collateral pledged by the buyer. They are allowed to auction the collateral to recover the outstanding loan amount. | A waived-off loan means that the lender must return any collateral pledged by the borrower at the time of taking the loan. |
| Eligibility | Financial institutions write off loans to clean up their balance sheets and optimise tax liabilities. Hence, all borrowers come under its purview. | A loan waive-off facility is mainly provided to farmers to help them during natural calamities that are impossible to deal with. |
| Compulsion | It’s mandatory for financial institutions to write off loans to keep their books and ledgers balanced and in check. | Borrowers cannot submit requests to waive-off loans. This is a voluntary activity from the lender’s end with the government’s support. |
The Bottom Line
Both a write-off and awaive-off take place under different circumstances. While the former is a mandatory practice, the latter is at the discretion of the government and the lender. To avoid either of the situations, it is best to calculate the amount you can repay with the help of a personal loan calculator.
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