In the financial industry, be it taxes, investments, or loans, a term that is periodically tossed around is “write-off.” We often hear this in the context of taxes (ex. “You will even get a tax write-off!”), but some are not familiar with what it actually means.
What does it mean?
When an investment, like a loan, becomes delinquent (i.e. payments are late) or in default and is deemed uncollectible, the lender has a choice to make concerning the outstanding investment amount. They can either charge it as an expense or a loss. It is an accounting action that diminishes an asset’s value while simultaneously debiting a liabilities account. It is commonly used by businesses looking to account for unpaid receivables, unpaid loan obligations, or losses on stored inventory. Generally speaking, it can be seen as something to help decrease an annual tax bill.
The core idea is to use the money in conducting business, which was initially put aside at the time of lending the money to borrowers. What differentiates a loan write-off from a loan “waive-off” (which we will dissect further in the next section) is that the loan amount is not totally cleared out. Banks will call for the write-off of a loan borrowed by a defaulter when there is a low – almost nonexistent – chance of loan recovery and its assets are non-performing.
Waive-Off: what’s the difference?
When it comes to write-offs and waive-offs, the main distinction is that a waive-off is when the loan-taker is free from the burden of repaying the loan amount. For write-offs, the financial institution maintains hope that the loan amount will be recovered from the person who has not paid it back.
When an individual applies for a loan and is not in a position to repay the loan amount thanks to financial setbacks, the government will sometimes waive off the loans. Obviously, this is done following a thorough investigation and background check to ensure that the borrower was genuine about not being able to make an earning and actually requires financial support. Such a thing can happen with farmers who acquire loans for their cultivation and, due to poor crop or climatic conditions, cannot earn enough and are unable to pay back the loan.
Overall, a non-performing asset is considered a write-off after all recovery options have been exhausted and the likelihood of recovering the loan amount is low. A loan write-off does not completely cancel out recovery, whereas a waive-off completely cancels the recovery of the loan. As such, the individual is no longer required to repay the loan amount.
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