Was your loan written off or waived off? Know the difference

Have you taken a loan and couldn’t pay back the loan amount?

And, one fine day, you received a mail stating that your loan has been written off. You may feel relieved but hold on!

You might be confusing loan write-off with waive-off.

In this article, we’ll learn about these two in detail and understand how they differ from each other.

What is a write-off?

A write-off is a situation when a lender realises that a loan is no longer recoverable and removes it from the company’s or bank’s financial records. Obviously, this happens when all the efforts to recover the loan have been exhausted.

Although the loan is written off as a loss for the company/bank, it doesn’t reduce the borrower’s liability to repay the loan. In this scenario, the lender might seize the collateral of the borrower or even sell it to recover the loan amount or balance. It reduces the lender’s tax obligations and helps in reflecting the true financial position of the lender.

Writing off the loan may also include selling the debt to the debt collection agencies or seeking legal action. It is more of an accounting treatment and has nothing to do with the borrower's liability to pay.

Example

ABC bank lent ₹ 1,00,000 to Mr A for a period of 2 years. Aman paid his instalments successfully for 6 months, but his financial condition worsened afterwards. As a result, he failed to pay the instalments.

The bank made all the efforts to recover the balance loan amount. Despite constant efforts, Mr A failed to pay the rest of the instalments.

Now, the bank has decided to write off the loan. The balance loan amount will now be recorded as a loss rather than a loan receivable. This will help the bank reduce its tax liabilities as it reduces projected assets and will represent the true financial position of the bank.

It is crucial to note that the borrower is still liable to pay the balance amount. His collateral can still be seized to recover the balance amount, or the matter can be taken to court.

Benefits of loan write-off

 It helps in maintaining accurate financial statements of the lenders and ensures that the lender’s balance sheets reflect only those assets that can actually be recovered.  It aids in reducing taxable income as the assets that can not be recovered anymore are reduced.  It allows lenders to focus on collecting and managing loans that are actually recoverable, rather than wasting time and effort on non-recoverable assets.  It also helps lenders to comply with accounting standards, as certain principles require lenders to write off unrecoverable loans.

What is a loan waive-off?

It is a situation when a borrower is actually exempted from repaying the loan or balance amount. The borrower is no longer asked to fulfil repayment obligations after the loan has been waived off.

It happens when there’s no chance of recovering the loan or the borrower has been declared bankrupt.

Here’s an example.

Suppose ABC Bank lent a loan of ₹3,00,000 to a farmer to buy seeds for agricultural crops. Due to excessive rainfall, the entire crop deteriorated. Hence, by no means, he’s able to repay the loan.

Sometimes, the government steps in to waive off the loan and exempt the borrower after assessing his financial health/condition.

Implications of a loan waive-off

For the borrower: The borrower is relieved of debt obligations, which can help in improving their financial condition by reducing financial stress.

For the lender: The lender may face losses as the amount lent can’t be recovered anymore.

However, it may improve the lender’s relationship with the borrower on humanitarian grounds.

Difference between a loan write-off and waive-off

Conclusion

Write-off and waive-off are different concepts and are practised under unique circumstances. Both have different implications for both lenders and borrowers.

Understanding these concepts helps in managing expectations and obligations effectively, ensuring that both lenders and borrowers are aware of their rights and responsibilities in each situation.