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.
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.
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.
Benefits of a Loan Write-Off
A loan write-off benefits the lender in the following ways-
1. Lenders can reduce their tax obligation on the total loan value after it is written off.
2. Lenders can remove non-performing assets and maintain a clean balance sheet.
3. In many cases, borrowers do not use their entire credit limit. They only borrow the required amount and pay interest on it. After the loan write-off, lenders can use the funds initially blocked for the borrower for their own business operations and expansion. 4. A loan write-off does not mean borrowers don't need to repay the loan. Lenders can continue pursuing the loan repayment, which, if received after the write-off, can be considered a profit in the year of repayment.
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.
Benefits of a Loan Waive-Off
A loan waive-off is particularly beneficial for the borrower in the following ways-
1. A loan waive-off significantly helps the borrowers as they no longer have to repay the loan, allowing them to focus on managing their other urgent financial needs.
2. Loan waive-offs can also help improve the borrower's credit score, boosting their chances of getting a loan in the future. However, the provision of loan waive-off mostly applies to farmers and other individuals in the agriculture sector.
Conclusion
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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You can apply for a personal loan online and track its status on our web portal. To know more, visit our website or give us a call today!
A loan write-off simply means the lender considers the loan a loss and accepts that it is unlikely to recover the loan. They write it off from the balance sheet to equalise it. However, it does not mean the loan is cancelled, and you are still obligated to repay it.
How does a loan write-off affect my credit score?
A loan write-off negatively impacts your credit score, indicating non-repayment, which can affect future loan approvals.
What are the common reasons for a loan waiver?
Loan waivers are usually granted due to economic hardships, natural disasters, or government policies aimed at easing borrowers' financial burdens.
What are the tax implications of a loan write-off or waiver?
Loan waivers and write-offs reduce the tax liabilities of the lender.
17 July 2024
6 mins read
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