In banking and finance, the term “write-off” is really just an accounting term. It means the bank or lender doesn’t count the money borrower owes to it. The financial statement of the bank will indicate that the written off loans are compensated through some other way. This is needed to cleanse the balance sheet of the bank. Cleaning of the balance sheet means bad assets are replaced.
There is no meaning that the borrower is pardoned or got exempted from payment. His debt will remain and recovery measures against him will continue. But on the balance sheet of the bank, a bad asset should remain bad forever. It should do some corrective action. In India, the major corrective action is provisioning. Here, the bank should use a part of its profit to replace the bad loans and it thus can be expressed as written – off loans. Once the borrower repays the money, it will be replaced back into profit.
Write-off thus does not mean that recovery comes to a stop. According to the RBI, ‘writing off’ of NPAs is a regular exercise conducted by banks to clean up their balance sheets.
Banks write-off advances at Head Office level as part of the balance sheet cleaning exercise and these loans continue to remain outstanding in the branch books.
In India, loan write-off as a technical is done within the framework of Income Tax Act, 1961. Similarly, there is the RBI Guidelines regarding provisions for bad loans as per Standard Accounting Practices.