Write-off policies for banks

Two banks with identical loan books can report very different non-performing loan ratios simply because one writes off faster than the other. This guide explains what IFRS 9 requires, how banks set write-off triggers for different products, the effect on coverage ratios, and the disclosures that let readers compare.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. 3 minute read.

Short answer

A bank's write-off policy decides when loans are removed from the balance sheet. Under IFRS 9, a bank writes off a financial asset, in whole or in part, when it has no reasonable expectation of recovering it. Writing off reduces the gross carrying amount and the loss allowance together, so it does not affect profit if the loss was fully provided. Policies usually set triggers by product, such as unsecured retail loans written off after 180 days past due, and secured loans written off after collateral is realised. Enforcement can continue after write-off, and recoveries are recognised in profit or loss.

At a glance

Test
No reasonable expectation of recovery
Can be
Full or partial
Effect on profit
None if fully provided
Unsecured retail
Often after 180 days past due
Secured loans
After collateral is realised
After write-off
Recoveries to profit or loss
Write-off policies for banksTest: No reasonable expectation of recovery; Can be: Full or partial; Effect on profit: None if fully provided; Unsecured retail: Often after 180 days past due; Secured loans: After collateral is realised; After write-off: Recoveries to profit or loss.KEY FACTS AT A GLANCEWrite-off policies for banksTestNo reasonable expectationof recoveryCan beFull or partialEffect on profitNone if fully providedUnsecured retailOften after 180 days pastdueSecured loansAfter collateral isrealisedAfter write-offRecoveries to profit orlossTax BakersWrite-off policies for banksTest: No reasonable expectation of recovery; Can be: Full or partial; Effect on profit: None if fully provided; Unsecured retail: Often after 180 days past due; Secured loans: After collateral is realised; After write-off: Recoveries to profit or loss.KEY FACTS AT A GLANCEWrite-off policies for banksTestNo reasonable expectation of recoveryCan beFull or partialEffect on profitNone if fully providedUnsecured retailOften after 180 days past dueSecured loansAfter collateral is realisedAfter write-offRecoveries to profit or lossTax Bakers
Key facts at a glance, as set out in this guide.

Where does write-off fit in a loan's life?

From default to write-offFrom default to write-off1DefaultStage 3,lifetime ECL2CollectionCalls, letters,agencies3RecoveryCollateral orsettlement4Write-offNo reasonableexpectation5AfterwardsRecoveries toprofit or loss
Writing off ends the accounting, not the collection.

A write-off example

An unsecured personal loan of 50,000 is 180 days past due and in stage 3, with an allowance of 45,000. The bank's policy is to write off unsecured retail loans at 180 days past due, as recoveries after that point have historically been small. It writes off the full balance: Dr Loss allowance 45,000, Dr Impairment loss 5,000, Cr Loan 50,000. The remaining 5,000 charge reflects that the allowance had not fully provided for the loss. The debt is passed to a collection agency; if it recovers 3,000 a year later, the bank records Dr Cash 3,000, Cr Impairment gain 3,000.

When is a partial write-off appropriate?

When part of a loan is clearly unrecoverable but the rest is not, so writing off the whole balance would understate what the bank still expects to collect. A loan of 1,000,000 secured on property expected to sell for 600,000, with no other recovery prospects, may be written down by 400,000, the unsecured shortfall, with the secured part kept until the property is sold. Partial write-offs are common for secured corporate and real estate loans.

How are secured loans written off?

Usually in two steps: a partial write-off of any part clearly not covered by collateral, then a final write-off of the remaining shortfall once the collateral has been sold and all proceeds received. Writing off the secured part before the collateral is realised would understate the asset, because recovery is still reasonably expected.

What about selling bad loans?

Banks often sell portfolios of non-performing or written-off loans to specialist debt buyers. Selling loans still on the balance sheet is a derecognition, with a gain or loss against their carrying amount net of the allowance. Selling loans already written off produces proceeds recognised as recoveries in profit or loss.

How does write-off timing affect bank ratios?

Before write-offAfter writing off 400 of fully provided stage 3 loans
Gross loans10,0009,600
Stage 3 loans800400
Allowance on stage 3600200
Stage 3 ratio8.0%4.2%
Stage 3 coverage75%50%

The write-off halves the stage 3 ratio and lowers coverage, with no change in profit or in the economic position. A slower write-off policy shows higher non-performing ratios and higher coverage. Analysts therefore compare write-off policies before comparing banks' asset quality.

What should a write-off policy cover?

  • Triggers by product and security type, such as days past due, bankruptcy, or completion of collateral sale.
  • Who approves write-offs, with higher authority for larger amounts and regular reporting to the credit committee.
  • How partial write-offs are decided for secured and corporate loans.
  • How enforcement and collection continue after write-off, and how recoveries are recorded.

Supervisors expect timely write-offs, because loans that will never be recovered left on the balance sheet distort asset quality metrics and comparisons between banks.

What must be disclosed?

IFRS 7 requires the bank's write-off policy, including the indicators that there is no reasonable expectation of recovery, and the contractual amount outstanding on assets written off during the period that are still subject to enforcement activity. See ECL journal entries, credit-impaired assets and bank accounting.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

When should a bank write off a loan under IFRS 9?

When it has no reasonable expectation of recovering the loan, in whole or in part.

Does writing off a loan affect profit?

Not if the loss was fully provided; the write-off uses the existing allowance. Any shortfall is an impairment loss.

What is a partial write-off?

Writing off the part of a loan that is clearly unrecoverable, such as an unsecured shortfall, while keeping the rest.

How do write-offs affect non-performing loan ratios?

Faster write-offs reduce stage 3 and non-performing ratios and usually lower coverage, without changing profit.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ECLECL journal entriesECLCredit-impaired assets and stage 3BankingBank accounting: the key IFRS issues

More in Banking

Previous in this topicForbearance and loan modificationsNext in this topicFair value levels in bank accountsTopicAll 15 guides in Banking

This guide is general information. It is not tax or legal advice for your situation.