Understanding Loan EMI Components

When you take a loan, repayment is done through Equated Monthly Installments (EMIs), comprising the principal and interest. Over time, the principal portion of EMIs increases, while interest decreases. Sometimes, borrowers struggle with repayments, leading banks to either write-off or waive loans. Here's a closer look at these options' distinctions.

Loan Write-Off Explained

A loan write-off happens when a bank removes the outstanding loan from its books to reduce non-performing assets (NPAs), as defined by the Reserve Bank of India (RBI) as loans overdue over 90 days. Despite this, the borrower still owes the amount, though the bank doesn't list it as an asset. Banks write off loans to minimize tax liabilities, claiming them as losses.
Mechanism includes asset seizure and auction, impacting banks financially. Over five years in India, roughly Rs 10 lakh crore in loans were written off; Rs 1,57,096 crore during FY 2021-22, down from the preceding year's Rs 2,02,781 crore.

Understanding Loan Waivers

In contrast, a loan waiver absolves borrowers from repayment entirely, offering relief during financial distress or natural events. When waived, borrowers are freed from debt without legal repercussions, and collateral is returned.

Comparing Write-Offs and Waivers

• Definition and Effects:
  • Write-Off: Bank removes loan from assets; borrower still owes. Recovery possible.
  • Waiver: Loan forgiven; borrower freed from obligation. Bank can't recover.
• On Borrower:
  • Write-Off: Continues owing; may face recovery actions.
  • Waiver: Relieved from debt; no further payments.
• On Bank:
  • Write-Off: Reduces NPAs; claims as tax loss.
  • Waiver: Absorbs full loss; no recovery.
• Collaterals:
  • Write-Off: Bank can seize/auction them.
  • Waiver: Ownership returned to borrower.

Financial Context and History

The choice between writing off or waiving depends on factors like borrower's financial health, loan amount, and collateral nature. Write-offs are preferred for potential recovery and tax benefits. Indian banks have recently managed massive NPAs via write-offs, totaling around Rs 10 lakh crore over five years. Conversely, waivers occur in unique situations, often for relief amid crises.

Practical Cases

For instance, Indian agriculture often sees state-led loan waivers after poor harvests for immediate aid. However, these can foster moral hazard. Corporate write-offs, involving legal maneuvers, occur when large companies default; banks write off loans, but may pursue asset seizures for recovery.

Conclusion: Making Informed Choices

Recognizing differences between write-offs and waivers is crucial for borrowers and lenders. Borrowers should understand their rights and engage with lenders when struggling. Banks need robust risk assessments and recovery strategies to manage portfolios effectively. With strategic communication, both parties can navigate the complexities, ensuring financial stability.

*[TDS]: Tax Deducted at Source
*[NBFC]: Non-Banking Financial Company