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Saturday, May 6, 2017

write off versus balance sheet cleaning

i tried for an open debate on write off versus balance sheet cleaning. as usual no takers.
here is my view again. the debate post is reproduced in the end.

1. loan waiver.
this is the ultimate. the loan is written off. the borrower is duly informed. no more recovery steps. the adjustment need not always be from accumulated profit or net worth. govt can also foot the bill.

2. write off.
the loan liability is set off in bank's books by adjusting provision. which is nothing but accumulated profit or portion of net worth renamed for this purpose. borrower is not absolved and hence not informed. recovery steps continue. whatever is recovered goes directly to the profit of the bank. not even routed thru the borrowal account. ( this however needs to be confirmed. i am not that sure. ). loan liability will appear in credit rating sites like cibil as the adjustment is done in bank's books only.

3. balance sheet cleaning.
frankly i don't know if it is any different from write off as above.

i am sure the confusion will be maintained at any cost. as this probably is the easiest tool to mislead public on huge bad loans and their imminent write off.

i repeat my earlier suggestion. balance sheet of banks should compulsorily declare these write offs ( at least in the form of notes as they are off balance sheet items ) and carry it forward to the next balance sheet to reflect the accumulated position.

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my earlier post
calling for debate
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This write off issue is getting into muddy waters . even my close friends , experts themselves , say technical adjustment or cleaning the balance sheet is different. Let's start a discussion. 1. Define loan waiver ,write off and cleaning of balance sheet . 2. Establish the linkage if any and determine the chronological order , that is , what comes first and what follows 3. Discuss the impact of each on the bank. 4. Discuss the impact of each on the borrower . let's debate. Before signing off I put the following suggestion too for debate. Balance sheet of banks should compulsorily have a note specifying the details of loans waived, written off and cleaned in the last 5 years.