Difference between Write off and Waiver of Loans

 Loan write-off and Loan waivers are two tools for dealing with bad loans. Many people are unaware of the differences between these financial terms. Though both loan write-offs and waivers seem similar, there are fundamental differences between them.

Take the case of an example. Your friend borrows Rs.1 lakh from you while moving away from town to another location, promising to repay you within a month. You wait for a few months and still get no reply from him.  

Thus, you have no way of getting your money back unless he returns to your city, which is far-fetched and next to an impossible event. So, what you do is write off the loan while still hoping to regain the money after some time.

Suppose after a few months, the same friend returns to your city and contacts you. He may apprise you of his poor financial condition and express his inability to repay the loan. He may beg you to forgive him in his dismal condition.

Now, you have the chance to waive off the loan. So, you will deliberately cancel the debt to be gained from the friend. Thus, loan write-off and waive of loans are 2 different things to deal with bad loans.

Recently these terms came into the picture when the present government was deemed by the RBI to have waived off loans amounting to over 6 lakh crores till September 2019. There was an outcry among opposition members against the waiving off of loans by top defaulters like Vijay Mallya and Nirav Modi while the country was in the grip of the COVID-19 pandemic. But later on, banks claimed to have written off such loans rather than waived them off.

What is a loan write-off?

A loan write-off is most applicable with regard to bad loans or non-performing assets of a bank. It implies a reduction in the original value of an asset, and it has no value in the future. A bad loan is typically written-off when the opportunities to recoup the loans are highly unlikely.

Banks make use of the write-off facility to get rid of non-performing assets from their balance sheet and make minimum their tax liabilities. But it is possible for the bank to recover bad loans that are written-off. Put simply; a loan write-off is a tool used by banks to clean up their balance sheets.

The main aim of writing off bad loans is to make use of this money in its current business activities. Such funds were initially kept aside for the borrower at the time of borrowing. At times, the lender may also opt to sell off bad debts to third-party collection agencies. 

The process of Loan write-offs is a regular activity conducted by banks to keep their balance sheet clean and rosy. But even when a bad loan is written off, the borrower continues to be legally liable for repaying the loan, and the bank may take legal action to force the borrower to pay up the outstanding amount.

Benefits of loan write-offs

By writing off a bad loan, the lender can enjoy the following benefits:

• It helps the lender or bank to set free the money that was blocked originally for the borrower. This money can be used by the banks for their routine business.

• When a loan is written off, it does not imply that the lender loses his legal right to recover the amount.

• It helps clean up the balance sheet of the bank.

• Using written-off loans, the bank can enjoy tax deductions.

• The lender is legally permitted to pursue debts and produce revenue from the same.

What is a loan waive off?

Loan waive-off is another term associated with bad loans. In Loan waive-off, the borrower is technically exempted from the repayment. It implies a situation in which there is no chance to recover the loan from the borrower. Thus, the borrower is freed from the burden of loan repayment, and the lender cannot recover anything. The bank will not recover dues from the defaulters, and no legal action can be taken against them.

A loan waiver is a selective provision. This is typically extended to farmers who have undergone a traumatic experience of failed crops because of adverse climatic conditions. Such conditions include drought, floods, earthquakes, and other natural calamities. Their farming will be impacted, and they will not be in any position to repay their debts.

Because of such uncontrollable situations, loan waive-offs offer financial relief to farmers by releasing them from the burden of loan repayment. In India, loan waive-offs are a crucial aspect of priority sector lending, like agriculture.

In sum, these are the differences between loan write-offs and loan waive-offs.