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The lender declares a particular loan a ‘bad debt’ or Non-Performing Asset (NPA) if you do not pay the EMIs for more than 90 days. Then there are two ways to proceed: the lender can either write it off or waive it off.
While two terms sound similar, they are two very different concepts. This makes it essential to know the difference between write-off and waive-off.
When lenders determine they cannot recover a loan, they may decide to forgive or waive-off the debt. This releases you from any repayment obligations. Additionally, it means the lender will not pursue the recovery of the loan or initiate any legal action against you.
For example, say that Aaryan loaned his friend Bharat a sum of ₹1 Lakh. Bharat loses all of that money in stock trading. Additionally, he also loses his job. Bharat then goes to Aaryan and explains his situation.
Realising that there is no way Bharat can possibly pay him back, Aaryan tells Bharat that his loan is forgiven and he does not want to recover the money anymore. This means that Aaryan has waived off Bharat’s loan.
Writing off loans is a practice that lenders perform periodically to clean up their balance sheets. When a lender writes off a loan, the loan account still remains in their books as they hope to recover it at a later date.
If you have offered any collateral, the lender confiscates it until you repay the loan. They may also auction the collateral to recover the borrowed sum. If you have not submitted any collateral, the lender may even take legal action against you to recover the amount.
Consider the example of Aaryan and Bharat again to understand how a loan write-off works.
In this scenario, instead of forgiving the loan, Aaryan has simply chalked off the loan recovery to a later date, owing to Bharat’s financial condition. Bharat eventually pays Aaryan back the borrowed money after a long delay.
While many use these two terms interchangeably, they represent distinct actions that lenders take to address loan repayments. The key differences between a loan write-off and a loan waive-off are as follows:
| Basis of Difference | Loan Waive-Off | Loan Write-Off |
|---|---|---|
Impact on the Borrowe |
A loan waive-off is a complete cancellation of a loan account, which means that you are free from that particular debt |
Lenders write-off loans to clean up the balance sheet, but the loan account stays in their books as they hope to recover it later |
Impact on the Lender |
When a lender waives a loan, it will not attempt to take any legal action against the borrower to recover the loan |
A loan write-off means that the loan account is not closed, which means that the lender can try to recover the loan amount with the help of a legal entity |
Collateral |
In the case of a waive-off, if the borrower has offered any kind of collateral to the lender, their ownership papers will be returned to them |
In the case of a write-off, any collateral given by the borrower will either be confiscated until the borrower makes the repayment or auctioned off to recover the loan amount |
Eligibility |
The government provides a loan waive-off facility to farmers during natural calamities |
It is a lawful process that is frequently carried out by banks in which they write-off loans to minimise tax liabilities |
Execution |
Lenders perform this action voluntarily with the support of the government |
It is a practice carried out by lending institutions on their own |
Here is how loan write-off impact borrowers and lenders:
1. Impact on Lender
Lenders can claim a tax deduction on the total loan value once it’s written off
It allows lenders to keep a clean balance sheet
Lenders can still pursue recovery of the bad loan, with any repayments received after write-off counting as profit
Lenders can utilise the previously blocked funds for business operations and expansion after writing off a loan
2. Impact on Borrower
It helps borrowers avoid exhausting their credit limit
They borrow what they need and pay interest only on the amount used
Lenders and borrowers experience the following impact due to a loan waive-off:
1. Impact on Lender
A loan waiver leads to a loss for the lender as it relinquishes a substantial portion of the loan amount
2. Impact on Borrower
A loan waiver benefits borrowers by eliminating any repayment obligation, enabling them to address other pressing financial needs
Loan waivers can also enhance the borrower’s credit score, increasing their likelihood of securing future loans
Although loan write-offs and loan waive-offs are both used in the context of bad debts, they are very different.
The key difference is that the lender initiates a write-off when loan recovery seems unlikely. In contrast, a waive-off is a relief the lender provides to borrowers.
A loan write-off can adversely affect your credit score by reflecting non-repayment. This, in turn, can lower your chances of obtaining loans in the future.
Loan waivers and write-offs lead to a reduction in the lender's tax liabilities.
Loan waivers are commonly granted in case of economic hardships, natural disasters, or government policies with an aim to ease financial pressures.
It refers to when a financial institution acts against a bad debt. Either it auctions your collateral or takes legal action to recover dues due to a default. The loan account stays in the lender’s books as they hope to recover it in the long run.
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