Q. Consider the following statements:
1.A loan write-off is when a borrower voluntarily decides to cancel or forgive the outstanding debt owed to the banks.
2.After the loan is written off, the borrower is relieved of their legal obligation to repay the amount.
3.A loan that has been written off is no longer considered an asset by banks.
Which of the statements given above is/are correct?
Statement 1 and 2 are incorrect. A loan write-off, also known as debt write-off, is a financial term used when a lender or creditor (bank) decides to cancel or forgive the outstanding debt owed by a borrower. However, a loan write-off does not mean that the borrower is absolved of their legal responsibility to repay the debt. After the write-off, banks are supposed to continue their efforts to recover the loan using various options.
Statement 3 is correct. Writing off a loan essentially means it will no longer be counted as an asset. By writing off loans, a bank can reduce the level of non-performing assets (NPAs) on its books. An additional benefit is that the amount so written off reduces the bank’s tax liability.