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Write off Loans

A bad loan (Non-performing asset) is written off after all avenues of recovery are exhausted and chances of recovery of due loan seem remote. To clear the balance sheet, all such kinds of loans are written off once for all. This is different from a loan waiver which is the cancellation of recovery or refraining from collection of dues

Note that a loan write-off causes a deduction in the value of the loan Portfolio by the amount of an expense or loss or non performing part of that portfolio.
Before these loans are written off, they should have been provided for as bad or doubtful loans under Accounting/Calculate Provisions.

Banks never assume they will collect all of the loans they make. This is why generally accepted accounting principles (GAAP) require lending institutions to hold a reserve against expected future bad loans. This is otherwise known as the allowance for bad debts.

For example, a firm that has disbursed $100,000 in loans might have to provide as an allowance for non payment of 5%, or $5,000, in bad debts. Once the loans are made, this $5,000 is immediately taken as an expense as the bank does not wait until an actual default occurs. The remaining $95,000 is recorded as net assets on the balance sheet.

To write of a loan in LPF the user should have proper user access rights to post the write off the transaction.

How to write of Loans

To write off loans you go to Loans/Write off Loans and a screen like the one below shows up:

Note that you cannot write off a loan on or before the disbursement date.

Note:
1.  When the features "Write off loans having provision less than 100%" and "Write off only loans in arrears beyond the expiry date" aren't ticked, all loans that are in arrears whether expired or not will be displayed.

2.  In normal practices, loans are usually written off when they are provided for 100%. However the LPF feature to "Write off loans having provision less than 100%" is meant to write off loans in circumstances when they are not 100% provided for but there is every business reason to suggest that the loans will not be recovered e.g when the borrower dies, files for bankruptcy or some kind of disaster happens to the business or borrower.

Click on the Write off command button to complete the write off or on the Close command button in order to exit without writing off.

In Loan Performer when you write off a loan it ceases to be an asset but effectively becomes an expense in as far as is not covered by the loan loss reserves.

At the time when the provision for Loans loss is made then the following bookings will be made:

Provision Costs A/C  (P & L)                                 Debit

        Provision for Bad Loans A/C (Balance)                Credit

When the loan is actually written off the following bookings are made

Provision for Bad Loans A/C (Balance)                Debit

Loans Written off A/C  (Balance)                           Credit

Note that the Loans Written off account will be netted off against the Outstanding Principal to get the Net Portfolio for the period.

In case the Loan is repaid later then the following bookings will be made:

Cash (Balance)                                                         Debit

Recovery of Loan Written off A/C (P&L)                   Credit

Note that you can view the report on the written off loans that have been repaid at Portfolio/Reports on Repayments/Repayments of Written-off Loans Report.

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