What is meant by a loan write-off? Everything you need to know about it!

As per an RBI report, banks have written off debts of around Rs 10 lakh crore in the past 5 years. In this huge number, the Public Sector Banks have reported a substantial chunk of these write-offs, at Rs 734,738 crore. On the other hand, the private sector banks accounted for around 27.28 percent of the complete write-offs.

The RBI has disseminated the data as a response to queries surrounding the Right to Information.

Only a 13% recovery of the Rs 10,09,510 crore has been possible to revolver by Indian banks. The rest of the amount had been written off.

Understanding bank loan write-offs!

In situations when a bank releases debts to a firm or individual, a decent amount of interest is what comes back along with the principal amount. This is thus considered an asset to the bank.

Writing off loans implies that the bank believes that the amount is not going to come back, and thus, it will no longer be considered an asset.

Therefore, when a bank writes off a particular loan, it considers it a non-performing asset. In such a case, it won’t be called an asset for the bank.

The use of writing off bank loans

We know that writing off loans implies lost assets for the bank. However, it also brings to the table some additional advantages. These include depreciation in liability and tax exemption. 

Writing off loans allows a bank to reduce the level of NPAs on the bank’s books. This in turn provides several benefits along with exemptions. 

An added advantage is that the figure so written off decreases the bank’s tax liability.