Gone but Not Forgotten: FAQs on Loan Write-offs

Team Finserv (finserv@vinodkothari.com)

Background

Loan write-offs in case of banks has been a consistent practice, and has been sharply criticized in several forums. Loan write-offs constitute a significant amount: Between FY 2015 and FY 2024, Scheduled commercial banks wrote off loans worth ₹12.3 lakh crore, with a ₹9.9 lakh crore written off in just the last five years (FY 2020 to FY 2024).

Year	Amount (in INR Crore)
2023-24	1,70,270
2022-23	2,08,037
2021-22	1,74,966
2020-21	2,02,781
2019-20	2,34,170
Total	9,90,224

Table 1: Loan write-offs by banks in the last 5 years (FY 20 – 24)

On the other hand, global supervisors and developmental bodies have always advocated a sound loan write-off policy for uncollectable loans. In its 2014 paper, IMF says: 

“Banking supervisors should have a general policy requiring timely write-off of uncollectible loans and assist banks in formulating sound write-off criteria. The benefits of timely write-offs of uncollectible loans are numerous … A bank should write off a loan or portion of a loan when it is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This does not have to be preceded by exhausting all legal means and giving up contractual rights on cash flows. This also does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this essentially worthless asset even though partial recovery may be realized in the future.” 

The IMF paper also discusses the potential downside of the write-off – that the reported NPLs would be lower, however, it argues that the write-off gives a better picture of the provision coverage.

European regulators have also extensively recommended loan-write off policy. In a 2017 paper¹, European Central Bank says: 

“An entity should write off a financial asset or part of a financial asset in the period in which the loan or part of the loan is considered unrecoverable. For the avoidance of doubt, a write-off can take place before legal actions against the borrower to recover the debt have been concluded in full. A write-off does not involve the bank forfeiting the legal right to recover the debt; a bank’s decision to forfeit the legal claim on the debt is called “debt forgiveness”.

The World Bank in a 2019 paper² has, likewise, given several benefits of a write-off as compared with provisioning: 

“An ambitious NPL write-off policy provides several benefits for banks and the financial system. 

Firstly, by resolving NPLs banks can focus on core business (i.e., financial intermediation) in terms of time and resources. By efficiently dealing with NPLs, including writing off, the bank can allocate its productive resources to new lending, instead of becoming an asset management company of “bad assets”. 

Secondly, while the main aim is the liquidation of assets with low recovery prospects, the consequence of an NPL write-off typically is a decrease of the NPL ratio in banks. Country experience shows that this is a particularly efficient way to decrease the NPL ratio quickly … 

Thirdly, there are no negative effects on financial statements, provided that loans are already fully provisioned and losses already recorded in the P&L statements. Fourthly, a decrease in NPL ratio should improve a ratings agency assessment of credit risks in the bank or in the financial system.”

IFRS 9 (Indian version Ind AS 109) specifically permits write-off, though its precursor, IAS 39 did not have a specific provision. 

Originally, write-off in India seems to have been inspired by tax considerations, as a mere provisioning qualifies for a conditional and limited tax deduction under sec. 43D of the Income-tax Act. On the contrary, write-off as a bad debt can be fully claimed. Therefore, as back as in 2009, the RBI advised: 

“Therefore, the banks should either make full provision as per the guidelines or write­-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules.” 

Similar paras appear in the Prudential circular of 2007 and 2008 too. 

What is the genesis of the word “technical write-off”? Is it coming from global jurisdictions? It does not seem so. As per our research, the 2009 circular of the RBI (cited above) permitted banks to write off advances at HO level, even though they are outstanding at the branch level [this, in present day parlance would mean, write-off in books of account, though still outstanding in the customer’s MIS LAN). 

The RBI stated: 

“Banks may write-­off advances at Head Office level, even though the relative advances are still outstanding in the branch books. However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100 percent provision will have to be made therefor.” 

This write-off, done at HO level but not at branch level, has been referred to as prudential or technical write off, that is written-off technically, but not written-off really. In the forms appended to Master Circulars of 2011 onwards, the word “technical write off” appears with the meaning referring to advances which are written off at HO level.

FAQs on Write off

Below are some of the pertinent questions on write-offs:

Meaning and Concept

1. As per Master Circular – Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated April 1, 2023 (‘Prudential Circular’), applicable upon Banks, there is a category of NPAs termed as “loss assets”. These assets are required to be fully written off. Likewise, the Framework for Compromise Settlements and Technical Write Offs (‘Technical Write-off Framework’) refers to “technical write off”. Is the write off of a loss asset, and the technical write off being discussed here the same thing?

Response:

Para 4.1.3 of the IRACP Circular defines a loss asset as follows: 

“A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection, but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.” 

This loss asset has been placed as a category under NPAs.

The Technical Write-off Framework states: 

“Technical write-off for this purpose shall refer to cases where the non-performing assets remain outstanding at borrowers’ loan account level, but are written-off (fully or partially) by the RE only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same.”

The Prudential Circular provides that loss assets are either to be written off, or to be fully provided for. On the other hand, the Compromise Framework clearly refers to full or partial write off.

The intent of the two is the same – to write down what is worthless. However, the Prudential Circular is referring to the degradation of an NPA – from substandard, to doubtful, to loss, where it comes to a stage where there is a trivial recovery value. The end result is the same – the first one is a mandatory prudential requirement; under the Technical Write-off Framework, accounting write-off is purely optional.

2. Can a lender do a partial write off? Or write off means the entire amount due from the borrower needs to be written off?

Response:

Very clearly, the technical Write-Off Framework provides the option for a partial write-off. Further, in terms of para 5.4.4 of Ind As 109 

“An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off constitutes a derecognition event [see paragraph B3.2.16(r)].“ 

Further, para B3.2.16(r) provides that,  

“The following examples illustrate the application of the derecognition principles of this Standard- (r) Write-off. An entity has no reasonable expectations of recovering the contractual cash flows on a financial asset in its entirety or a portion thereof.“

Therefore, accounting norms also allow for partial write offs and to the extent the loan has been written off, the lender can derecognise the loan asset from their books.

3. What is the approach towards write off? In case of secured loans, and in case of unsecured loans?

Response:

The key to determination of write-off is the extent of recovery in an impaired loan. That is, what is considered not recoverable is written off. So, the task is to recognise (a) an impaired loan; (b) make a fair estimate of recoverable amounts from the loan; (c) apply a suitable discounting factor; and thus, find the fair value of the loan. The difference between the POS and such fair value becomes the amount of the write-off.

In case of secured loans, the focus is on the value of the collateral, the haircut on its valuation due to sale of repossessed collateral, legal expenses and costs on recovery, the time taken, etc.

4. What is the stage of write off – only when the asset turns an NPA or can the write off be done before it is recognised as NPA?

Response:

The Technical Write-off Framework refers to technical write off in case of NPAs. The IRACP Circular (applicable upon Banks) also refers to a loss asset as a sub-category of NPAs. However, under the SBR Directions (relevant for NBFCs), loss asset is not a sub-category of NPA but is defined as a separate asset class:

(i) an asset which has been identified as loss asset by the NBFC or its internal or external

auditor or by the Reserve Bank during the inspection of the applicable NBFC, to the extent it is not written off by the applicable NBFC; and

(ii) an asset which is adversely affected by a potential threat of non-recoverability due to

either erosion in the value of security or non-availability of security or due to any fraudulent act or omission on the part of the borrower.

That, however, does not imply that a lender cannot have a policy of recognition of impairment before an asset turns NPA. This will depend on the nature of the asset. For example, in case of personal loans, if a lender recognises a loan as impaired after 60 DPD, the lender may do a write off. Of course, there is no justification to do a write off if the loan is not considered impaired, on the basis of the parameters that may be applicable to the said loan.

5. There are two facilities to a borrower – can one be written off while the other one continues? What will be the basis for the same?

Response:

Yes. It is possible that one loan is backed by a tangible collateral, say, home loan or gold loan, while the other loan is unsecured. While the borrower may default on the unsecured loan, he may be maintaining performance on the secured loan, in order not to lose the collateral. If the value of the collateral, on the basis of principles discussed above, is good, it is possible to conclude that no write-off is required in case of the secured loan, while write-off may be done in case of the unsecured one. 

6. If one facility to a borrower is written off, can the other continuing facility, which is not in default, be treated as performing/standard?

Response:

Even though one loan (having a DPD status of 90+ days) is written off, the borrower’s liability to pay and the lender’s right to recover continue. The borrower is a defaulter. NPA classification is based on borrower, and not on facility. Hence, the other facility will remain NPA.

7. After write-off, can the lender give a fresh loan to the borrower?

Response:

We find it quite difficult to justify giving a fresh credit facility to a borrower who caused a write-off. However, para 12 of the Technical Write-off Framework allows giving of new loans to a borrower whose account has been written off after a minimum cooling period decided in accordance with the lender’s Board-approved policy.

8. In case a borrower has been written off by a particular lender, can another lender extend a fresh loan to such borrower? Would the cooling period provision be applicable in such a scenario? 

Response:

The response to this seems affirmative, as the language of the Technical Write-off Framework suggests that bar on taking fresh exposure during the cooling off period is on the RE involved in the arrangement, however, it does not suggest any prohibition on other lenders to take fresh exposure during this period. 

Of course, other lenders will have to take their own informed credit call and carry out the credit assessment in view of the impaired credit history of the borrower.

9. What is the difference between:
   1. write off and waiver 
   2. Write off and restructuring

Response:

Waiver is the exhaustion of all rights to recoverability of the loan amount as compared to write offs where the lender writes off the amount only for accounting reasons but retains the legal right to recover money. 

For difference between write off and restructuring, refer to our write up – A comprehensive framework for compromise settlement and technical write offs.

Policy and Approval Hierarchy

10. What should be the contours of the write-off policy? If there is an SOP for write off, what will the SOP contain?

Response:

The write off policy must contain the following aspects:

1. Condition precedent for write offs – this may include:
   1. Efforts taken for a one-time settlement;
   2. death of the borrower with absence of insurance;
   3. achievement of a certain number of days past due before writing off);
   4. Deterioration in the collateral value
   5. a stipulation that if the monthly recovery drops below a certain % of the loan outstanding only then will the loan be written-off;
   6. untraceability of borrower;
   7. absence of guarantor support;
   8. minimum time elapsed since last recovery;
   9. exhaustion of all possible legal remedies etc. 
2. Approval authority for the write-off – an approval matrix should be drawn for this purpose based on:
   1. Size
   2. Nature of loan
   3. DPD status
3. Determining the write off amount – this will be based on the extent of security available, recovery efforts already taken, recovery costs associated etc.
4. Reporting Mechanism for write offs – to the board and CICs

The SOP on the other hand should provide for the following:

1. Recovery efforts taken and exhausted before arriving at the write off decision
2. Determination process of the write off amount 
3. Recovery efforts to be taken after write off etc. 

11. Who should approve the write off?

Response:

The delegation of powers for approving write-offs should be clearly articulated in the Policy (Para 5 of Annex to the technical Write off Framework). To ensure objectivity and avoid any potential conflict of interest or a ‘judge in its own case’ scenario, the write-off should, as a general principle, be approved by an authority which is at least one-level higher than the sanctioning authority of the original exposure. The approving authority should  be determined based on factors such as the size of the exposure/write-off, the nature and duration of the borrower relationship. The policy should provide adequate flexibility while maintaining robust checks and balances.

12. What evidence of uncollectability is required to be put on record for write-off action?

Response:

The assessment will be borrower-specific. A detailed record of all the recovery actions taken, outcomes, and reasoned justification that all reasonable recovery measures have been exhausted, and further recovery is impractical, shall be maintained. This shall include reminders, follow-ups, legal notices, enforcement actions, and other efforts undertaken. 

13. An aggressive lending policy, backed by an aggressive write off policy – what implications does it have for the lender, or for the system? In a situation where the lender is witnessing high levels of write off, is there a need to revisit the lending policy ?

Response:

Lending has to be responsible, that is, lenders have to assess the prospects of recovering the loan in view of the borrowers’ cashflows. Lenders determine their lending spreads based on expected losses of the portfolio. Therefore, the cost of defaults is charged on the borrowers. Aggressive lending, in a way, involves the cost of the defaults being passed on to those who mean to pay. The assessment of the borrowers’ ability to pay is not merely an ex ante assessment – it is also benefited by the feedback from performance of the existing pools. Therefore, if a pool is having significant and excessive write off, lenders need to reexamine their lending practices.

Reporting

14. When the lender writes off the loan, is the lender required to notify the same on the CIC portal?

Response:

Yes, as per the data formats laid down in Annex IV of Master Direction – Reserve Bank of India (Credit Information Reporting) Directions, 2025, a credit institution is required to report written-off amount (total and principal). When an account is reported as written-off and the borrower makes the complete payment, i.e., through settlement or otherwise, the ‘Credit Facility Status’ field in CIC reporting shall be reflected as ‘Post Write Off Closed’.  

15. How long will a lender be required to report write offs to CICs ?

Response:

It may be operationally challenging for lenders to report write-off cases indefinitely. However, considering that the idea of CIC reporting is borrower behaviour, the borrower continues to be a defaulter. Therefore, merely because a loan is written off in accounting books should not mean it should be taken off CIC records. 

Accounting 

16. Is there accounting guidance on how the amount of write off/partial write off is to be computed?

Response: 

As per Paragraph B5.4.9 of Ind AS 109, 

“a financial asset, or a portion thereof, is required to be written off when there is no reasonable expectation of recovering the contractual cash flows. The standard allows for partial or full write-offs, depending on recoverability assessments. For example, if 30% is expected to be recovered via collateral and no further recovery is reasonably expected, then the remaining 70% is to be written off.”

However, Ind AS 109 does not prescribe a specific methodology for computing the amount to be written off, nor does it provide distinct guidance for unsecured lending. In such cases, since no collateral is involved, the amount can be determined based only on how much recovery is reasonably expected from the borrower. For this purpose, the lenders must have a SOP in place which will determine the write off amount based on the expectation of recovery, cost of recoveries, DPD status, borrower history etc.  

17. When an asset is written off, what happens to the specific provision made against the asset, which is outstanding?

Response:

When a loan is written off, the entire amount that is being written off is charged to P/L

When a loan is written-off, the gross carrying amount of the loan is reduced to zero. The specific provision already created against it is utilised (i.e. reversed) against the carrying amount. In other words, as the loan is written off, so is the specific provision against such loan.

18. What is the impact of write off on the impairment for ECL?

Response:

A write off is a case of incurred loss, whereas ECL is made for expected loss. Expected loss should precede incurrence of the loss, since ECL is forward looking. Therefore, the extent of write off should force a lender to re-examine and calibrate the ECL estimation, such that a write off does not exceed the ECL against such assets.. 

19. Is it justifiable to say that there was no SICR and the asset was written off?

Response:

Sans any Significant Increase in Credit Risk (SICR), a financial asset remains in Stage 1 under Ind AS 109. It is generally not prudent to write off a Stage 1 asset, as a write-off requires the lender to have no reasonable expectation of recovering the asset, in whole or in part, a condition that ordinarily implies the asset is credit-impaired and therefore classified under Stage 3. That said, as discussed in above, a write-off before an asset turns to NPA may still be possible, provided there is objective evidence of impairment based on the lender’s internal credit risk assessment, particularly in cases such as short-tenure personal loans or unsecured retail loans, where credit deterioration may manifest earlier than 90 DPD. 

20. What will be the accounting treatment for the recoveries received after an account has been written off?

Response:

Any amount received (principal or interest) after a loan account has been written off will be shown as other income in the P/L. 

Tax treatment

21. What will be the tax treatment for write off in the books of the lender?

Response:

For Banks and NBFCs, the tax treatment of loan write-offs is primarily governed by Sections 36(1)(vii) of the Income Tax Act, 1961 (‘IT Act, 1961’). As per Section 36(1)(vii), these entities can claim a tax deduction for bad debts or parts thereof that are actually written off as irrecoverable during the financial year. There are conditions as evidence of the amount having been taken in computation of income, as also reference to accounting standards – ICDS – under sec. 145 (2).

In addition, deduction is allowed for provision, upto limits, under Section 36(1)(viia).

Hence, if there is a write off, the same is deductible against income. However, if the write off was preceded by a provision, and the entity has claimed the benefit of the provision u/s 36 (1) (viia), then the write off should be first adjusted against such provision.

Further, in terms of Section 43D of the Income tax Act, an amount which has already been written off and subsequently recovered will be chargeable to tax in the previous year in which it is credited by the lender to its P/L account or in the year it is actually received, whichever is earlier. 

Other resources –

1. A comprehensive framework for compromise settlement and technical write offs
2. Stop crazy lending, lazy lending, write Rajan and Acharya

1. https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf#page=80&zoom=100,72,846 ↩︎
2. https://thedocs.worldbank.org/en/doc/372351569367201917-0130022019/original/FinSACNPLWriteoffsCESEERegion.pdf ↩︎