What is a loan write off?

A loan write-off is used when banks want to clean up their balance sheets from non-performing assets (NPA). Any asset becomes non-performing when it ceases to generate income for the bank. Loans are typically written off when there is no scope for recovery. Say a bank has disbursed a loan of Rs 1 crore and has set aside Rs 10 lakh as provision. If the borrower defaults on Rs 50 lakh, the bank can write off Rs 40 lakh from its balance sheet and term it as an expense. In this case, it frees up the Rs 10 lakh it had set aside. Even after a write-off, the bank can seek to recover a loan.