Term of the Day: Write-Off: It is an accounting term In bank | ECONOMY by VIVEK SINGH

Term of the Day:

Write-Off: It is an accounting term In banking and finance. Loans are assets for banks and bank expect that it will receive interest and principal back. When banks don't receive either interest or principal on the due date (say 29th April, the interest and principal is due and the bank did not receive on 29th April), then immediately bank declares it 'DEFAULT'. If the bank does not receive interest or principal for 90 days then it declares the loan paper as Non Performing Asset (NPA).

But even if the loan paper has turned NPA, it does not mean that bank will not receive its money in future. There may be chance that in future the project turns profitable and the bank gets entire money back OR it may be the case that bank is able to get only 40% of the loan OR it may be possible that bank don't get anything. But till there is HOPE, banks keep on trying to recover the NPA amount through various means and it remains on the Account Books of the Bank.

If the bank has exhausted all its attempts/measures and it has lost all hopes regarding getting the loaned amount back then generally it "WRITES-OFF" that loan amount. So, Suppose the bank had lent Rs. 1000 crore to a debtor, which is an asset on bank's balance sheet. So, first it will become NPA and then, in case of WRITE OFF, the bank may reduce the loan amount (asset) to zero (and removing the NPA from the Account Books) and it will show this Rs. 1000 crore amount as an expense/cost for the bank and adjust the balance sheet of the bank.

But, it does not mean that the borrower has been pardoned or got exempted from payment. (in future, the borrower may return the money then the balance sheet may get adjusted again but practically never happens )