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Loan write-off and loan waive-off are terms commonly used in the realm of finance. Although they sound similar, their implications are different for lenders and borrowers. Understanding the difference between loan write-off and waive-off can help you make more informed borrowing decisions.
When borrowers are unable to pay back their loans, lenders consider them as bad loans or Non-Performing Assets (NPAs). Lenders deal with these bad loans in two ways - loan write-off and loan waive-off. These methods help lenders balance their ledgers. However, the terms often create confusion for the borrowers.
This guide will help you learn the meanings of loan write-off and loan waive-off, their benefits, and their differences. If you know about these loan terms, you can make more informed decisions when evaluating borrowing options.
Write-Off Loan Meaning
When a lender recognises that a loan is no longer collectable, it decides to write off the loan. In simpler words, banks accept that it is unlikely for them to recover the outstanding loan amount and decide to close the account.
A loan write-off facility lets banks remove non-performing assets from their balance sheet and minimise their tax* obligations. The bad loan becomes a loss for the lender, affecting their profitability.
Writing off a loan does not mean the borrower no longer needs to repay the debt. It is still reflected in the lender’s account, and they can pursue recovery in the future. The lender can seize the collateral provided by the borrower until repayment of the loan. The collateral may potentially be sold at an auction to recoup the loan balance. The lender can also take legal action or sell bad loans to third-party collection firms.
Generally, loan write-offs work in cases where the defaulter has not paid the loan EMIs for an extended period.
Example of Loan Write-Off
Here is a detailed example to help you understand a loan write-off.
Mr Mehra took a loan for ₹5 lakhs with a tenure of two years. He paid his EMIs regularly for four months. However, after this period, he struggled to meet daily expenses and defaulted in making EMI payments without intimating the lender.
The lender followed up, but there was no repayment despite consistent reminders. Eventually, the loan’s term expired. There was no way to get Mr Mehra to pay the debt. Consequently, the lender decided to write off the loan.
So, you can understand the write-off loan meaning as a situation wherein the lender reduces the loan’s original value because they might not be able to recover it completely. However, the loan is not closed. This means that the lender can still try to recover the reduced or full loan amount from Mr Mehra.
Benefits of a Loan Write-Off
The loan write-off facility is beneficial for lenders in the following ways:
- Lenders can maintain a clean balance sheet.
- Lenders can enjoy a tax deduction on the total loan value after it is written off.
- Lenders can continue pursuing recovery of the bad loan. Thus, if they receive a repayment after writing off the loan, it is a profit in the year of repayment.
- Many borrowers do not exhaust their entire credit limit. They borrow the required amount and pay interest on actuals. After writing off the loan, lenders do not need to release the funds blocked for the borrower. They can use this money for business operations and expansion.
Waive-Off Loan Meaning
A loan waive-off exempts the borrower from repayment. In this case, the bank or the financial institution acknowledges that there is no way they can recover the loan given to the borrower. Unlike a loan write-off, this activity relieves the borrower from the obligation of loan repayment. Moreover, the bank does not collect dues or take any legal action against you.
Granting loan waivers is a voluntary provision. It is provided to farmers who have suffered from challenging situations like floods, poor monsoons, draughts, or other natural disasters. These scenarios are beyond human intervention, and a loan waive-off aids in providing financial relief. The provision of loan waive-off is offered with the assistance of the government.
For a better understanding of the waive-off loan meaning, consider the example of Mr Sharma. He borrowed a personal loan of ₹10 lakhs for a tenure of five years to purchase agricultural equipment. However, a natural disaster led to significant losses, forcing him to declare bankruptcy.
Since Mr Sharma cannot repay the loan, the bank, with the government’s support, decides to waive his loan. This facility applies in exceptional circumstances only.
Benefits of a Loan Waive-Off
A loan waive-off benefits the borrower significantly as they no longer need to repay the debt. This gives them the required financial respite and lets them focus on ways to make ends meet.
Moreover, loan waive-offs can improve the borrower’s credit score, which has a positive impact on their future creditworthiness. This provision is mostly for farmers and individuals in the agricultural sector.
Loan Write-Off vs. Waive-Off - How are they different?
The key loan write-off vs. waive-off differences are as follows:
Parameters |
Loan Write-Off |
Loan Waive-Off |
Impact on borrower |
The lender writes off the loan, but the borrower is still obligated to repay the debt. |
The lender cancels the loan, freeing the borrower of any repayment obligations. |
Impact on lender |
The lender writes off a loan to equalise its balance sheets. It is a loss for the lender, as the debt is no longer considered an asset. |
A loan waive-off results in a loss for the lender because they are foregoing a significant portion of the loan money. |
Eligibility |
Lenders write off loans to minimise tax liabilities and clean up their balance sheets. Thus, it applies to all borrowers. |
The facility of loan waive-off is offered by the government to mainly help farmers during natural disasters they cannot deal with. |
Collateral clauses |
If the borrower has pledged any collateral, the lender can legally retain it after a loan write-off. They can recover the outstanding loan amount by auctioning the collateral. |
In the case of a loan waive-off, the lender has to return the collateral pledged by the borrower. |
Execution |
Financial institutions engage in this practice frequently to maintain clean and balanced ledgers. |
The activity is voluntarily performed with the government’s support. |
Final Thoughts
The most prominent difference between write-off and waive-off is that the former is an action taken by the lender when recovery of a loan is unlikely, while the latter is a relief given by the lender and the government. In the case of a loan waive-off, borrowers are no longer obligated to repay their debt.
You can use a personal loan calculator to estimate how much loan you can repay conveniently and avoid either of the situations. Alternatively, SME insurance can be a credit shield to protect your business from financial hardships.
