Regulated Entities like banks and NBFCs may undertake technical write-offs in loan accounts that are either considered unrecoverable or whose recovery is likely to consume disproportionate resources of the lenders. The board approval will be required for compromise settlements or technical write-offs for accounts categorised as wilful defaulters or fraud.
As for technical or prudential write-off, this is the amount of non-performing loans which are outstanding in the books of the branches but have been written off at the head office level. For example, a bank has already made 100% provision on a loan which is considered a “Loss” asset by the bank. These assets represent little hope of immediate recovery. True to their name, ‘prudential norms’ would have banks remove these assets from their balance sheets. This technical writing-off helps the bank present a true picture of its asset base frees up provisioning resources and can also help the entity save on taxes for assets that offer no immediate return. What needs to be noted here is that recovery efforts for this non-performing loan continue as before, and what is retrieved gets added as a profit of the lender. But this write-off does not mean that the bank will not try to recover money from you. They might either try to continue to recover the money themselves or sell such a loan to a recovery company. The borrower’s debt has been written off from a creditor’s book but not from its memory.
However, such technical write-offs do not entail any waiver of claims against the borrower and thus the lenders’ right to recovery is not undermined in any manner. Legally speaking, the borrower continues to owe the money to the bank. Therefore, the defaulting borrowers are not benefited in any manner and their legal obligation as well as the costs of such defaults for them remains unchanged vis-à-vis the position prior to technical write-offs.