Loan Waiver and Loan Write off – Key Points

We all have often listened to these 2 terminologies from time to time. As the name suggests both these terminologies are related to Bank Loan and advances and by the name both look like that some concession or total waiver of loan has been done. So lets understand these 2 terminologies completely.

Loan Waiver :

Banks for sure cannot waive loans. Loan waiver is done by governments. Government’s pay overdue amount in the loan accounts to the banks and banks in turn close the account. In such a situation government gives relief to a customer by paying his debt. This is known as loan waiver.

Loan Write OFF:

Banks has to do loan provisioning as per RBI guidelines in India.
Provisioning: For every loan disbursed, bank has to set off some amount from their operating profits towards provisioning.This provisioning can be understood as a cushion to safeguard depositor’s interest if loan repayment doesn’t come in time.

Now when a account turns to NPA (installments not paid for more than 90 days), this provisioning increases as per the list below.

*Asset type	Provisioning requirement
Loss assets	Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 % of the outstanding should be provided for.
Doubtful assets	(i) Unsecured portion: 100 % of the extent to which the advance is not covered by the realisable value of the security.(ii) Secured portion: rates ranging from 25 % to 100 % of the secured portion depending upon the period for which the asset has remained doubtful. (25% for upto one year, 40% for 1-3 years and 100% for more than 3 years).
Substandard assets	A general provision of 15 % on total outstanding should be made.
Standard assets	Provisioning from 0.25% for MSME loans to 12.4% for restructured housing sector teaser loans.

* table from https://www.indianeconomy.net/

This would mean that once an account turns NPA, in next 4 years, bank will do 100 provisioning for the loan, and will treat it as a loss asset.
Now banks write off such accounts from their books because banks have made 100% provisioning for the loan given.

But here is a catch: Bank’s write off loans to clear their balance sheet of NPA, but banks still have complete right to ask for money from the borrowers and now whatever they get goes into their profit.

So in a nutshell, loan waiver is loan closure with help of government but loan write off is just a banking technique to make balance sheet look cleaner.

sehpaathi