Loan write-off

Also called: Technical write-off, Prudential write-off · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

A loan write-off is when a bank removes a bad loan (an NPA it has already covered with provisions) from its balance sheet for accounting purposes. The borrower still owes the full amount, and the bank keeps trying to recover it. It is also called a technical write-off or prudential write-off.

• Why it matters: write-offs clean up bank balance sheets and make the NPA ratio fall. So a lower GNPA ratio does not always mean the bank has got its money back.
• Why it is often misread: people and newspapers often call a write-off a "waiver". A write-off does not cancel the debt, so this is a common exam trap.

Explanation

How a write-off works

• Step 1: the loan turns bad.
• The borrower does not pay interest or instalments for more than 90 days.

• The loan becomes a Non-Performing Asset (NPA), which means the bank earns nothing from it.

• Step 2: the bank sets aside provisions.

• A provision is money the bank keeps aside from its profits to cover a likely loss.

• Over time, the bank sets aside enough to cover the whole loan. The loan is now fully provided.

• Step 3: the bank writes the loan off.

• The loan and its provision are both removed from the balance sheet.

• The loss was already charged to profits through the provisions. So a fully provided write-off does not cause a fresh hit to profits.

• Step 4: recovery continues.

• The bank can still recover the loan through the courts, DRTs (Debt Recovery Tribunals) or the IBC (Insolvency and Bankruptcy Code, 2016, the law that sets a time-bound process for companies that cannot pay their debts).
• Any money recovered later is counted as income for the bank.

Technical write-off and prudential write-off

• Technical write-off: the NPA stays outstanding in the borrower's loan account. It is written off, fully or partly, only for accounting purposes. No claim against the borrower is given up [4].
• Branch level and balance sheet: the account is kept alive at the branch, so recovery can continue. It is removed only from the bank's published balance sheet.
• Prudential write-off: this is the same idea. A write-off is done as a matter of prudence (careful accounting), even though the legal claim is kept.
• Full or partial: a bank can write off the whole loan or only part of it.

Worked example: what a write-off does to NPA ratios

• Before the write-off:
• Loans given: Rs 1,000 crore. NPA: Rs 100 crore. Provisions: Rs 70 crore.
• GNPA ratio = 100 ÷ 1,000 × 100 = 10%
• NNPA = 100 − 70 = Rs 30 crore. NNPA ratio = 30 ÷ 930 × 100 = about 3.2%

• PCR (Provision Coverage Ratio) = 70 ÷ 100 × 100 = 70%

• The bank writes off Rs 50 crore of the NPA. This part is fully provided, so Rs 50 crore of the Rs 70 crore provisions is used up.

• After the write-off:
• Gross advances = 950. GNPA = 50. Provisions = 20.
• GNPA ratio = 50 ÷ 950 × 100 = about 5.3%. It has almost halved.
• NNPA = 50 − 20 = Rs 30 crore, the same as before. Net advances = 950 − 20 = 930. The NNPA ratio stays about 3.2%.

• PCR = 20 ÷ 50 × 100 = 40%. It has fallen.

• Lesson:

• The GNPA ratio fell sharply, but the bank recovered nothing.
• The borrower still owes Rs 50 crore.
• NNPA did not change, because the written-off loan was already fully covered by provisions.

What makes write-offs rise or fall

• More write-offs happen when:
• there are many old NPAs that are already fully provided;
• banks want to clean their balance sheets and free up capital;

• banks can see that recovery will be slow, for example through long court cases.

• Fewer write-offs are needed when:

• new bad loans fall, because banks lend more carefully and spot stress earlier;
• more loans are resolved or recovered through the IBC.

In India

• Regulator: the RBI sets the rules for how banks classify NPAs, set aside provisions and write off loans.
• Key rule: the RBI circular of 8 June 2023, "Framework for Compromise Settlements and Technical Write-offs" [4]:
• A technical write-off does not give up any claim against the borrower [4].
• Lenders must have a board-approved policy for such settlements [4].
• Cooling-off period: a borrower must wait at least 12 months after a technical write-off or settlement before getting fresh credit. Farm loans are excluded [4].

• The framework also covers wilful-defaulter and fraud accounts. Criminal cases against these borrowers continue [4].

• Part of the 4R strategy: since 2015, the government has followed Recognition, Resolution and Recovery, Recapitalisation, and Reform [2].

• Write-offs happen after Recognition, meaning once bad loans are shown honestly.

• The Asset Quality Review (AQR) of 2015-16 under Governor Raghuram Rajan forced banks to show their hidden NPAs.

• Fall in NPAs, which write-offs helped bring about along with recovery:

• PSB (public sector bank) GNPA ratio: 4.97% (March 2015) → peak of 14.58% (March 2018) → 3.12% (September 2024) [2] → 2.30% (September 2025) [3].

• All scheduled commercial banks: GNPA ratio of 2.3% (March 2025), a multi-decadal low [1].

• Large write-offs: banks have written off large amounts in total over the past decade. This is why MPs and newspapers often ask whether falling NPAs reflect real recovery or only accounting.

Don't confuse with

• Loan waiver: the debt is legally cancelled, and the borrower owes nothing. Farm-loan waivers are an example. After a write-off, the borrower still owes the full amount.
• Compromise settlement / One-time settlement (OTS): the lender agrees to accept a smaller amount and gives up the rest of its claim [4]. In a technical write-off, nothing is given up.
• Provision: money set aside to cover a likely loss. The loan stays on the books. A write-off removes the fully provided loan from the balance sheet.
• Evergreening: a fresh loan is given so the borrower can repay old dues, which hides an NPA. A write-off happens after the NPA has been recognised and provided for.

Prelims Hooks

• A write-off does NOT cancel the debt. The borrower still owes the money, and recovery goes on through the courts, DRTs or IBC. Only a waiver cancels the debt.
• Technical write-off: the NPA stays in the borrower's loan account but is written off only for accounting purposes. No claim is given up [4].
• Trap: a fall in the GNPA ratio can come from write-offs, not only from recovery.
• RBI framework of 8 June 2023 on compromise settlements and technical write-offs: 12-month cooling-off before fresh credit. Farm loans are excluded [4].
• Writing off a fully provided loan lowers GNPA, but leaves NNPA unchanged (NNPA = GNPA − provisions).
• Settlement with a wilful defaulter needs board approval in every case, and criminal cases continue [4].

Mains Points

• Balance-sheet clean-up versus accountability:
• Write-offs remove dead loans from the books. Banks can then show their real health, free up capital and lend again. This helped solve the twin balance sheet problem, where stressed banks would not lend and indebted companies could not invest.
• Critics say large write-offs make NPA figures look better than recovery really is. They also say write-offs may reduce the pressure on banks to recover.

• A balanced answer should give recovery data alongside GNPA data, and should stress that the legal claim stays alive.

• Write-offs and the June 2023 settlement framework:

• Supporters say write-offs and compromise settlements give faster results than long court cases.
• Critics say that letting wilful defaulters settle may reward bad behaviour. It raises a moral hazard question: borrowers may default on purpose if they expect an easy deal.

• Safeguards include board approval, criminal cases that continue, and a 12-month cooling-off period [4].

• Link to governance reform:

• Write-offs deal with past losses. They do not stop new bad loans from building up.
• Preventing another NPA cycle needs early stress detection, a working IBC and PSB governance reform under the 4R strategy [2]. Otherwise write-offs, like recapitalisation, keep putting the cost on taxpayers.

Related concepts

• Twin balance sheet problem
• Evergreening
• Asset Quality Review
• Loan restructuring
• Bank recapitalisation
• One-time settlement
• Wilful defaulter

Read more

• The NPA crisis: twin balance sheets, evergreening and the clean-up