In this article, we’re discussing bad debts, meaning, examples, and how it applies to the world of banking.
This is part of our free series on banking in India, covering topics like opening an NRI bank account, which you can access here.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Bad Debts Meaning
- Examples of a Bad Debt in Accounting
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
Bad Debts Meaning
Bad debts, meaning debts that are no longer recoverable, must be written off by the lender. In banking, the definition of bad debts is specific to loans and credit that borrowers are unable or unwilling to repay.
Not surprisingly, bad debts have the ability to negatively affect a bank’s financial stability. So banks need to have both an allowance and a system for recovery in place. In other words, proper management of bad debts by a bank is critical to the stability of the financial institution.
That said there are different types of bad debts, and depending on the clientele and jurisdiction, a bank may be more exposed to one over others. As a result, banks may be better positioned at recognizing certain bad debts from one client group than others, which can help with avoiding them altogether.
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Examples of a Bad Debt in Accounting
When it comes to banking, there are a number of specific examples of bad debts that get accounted for. Below, we will highlight five of the most common examples.
1. Customer Defaults
Customer defaults are when customers fail to pay their credit or loan balance for an extended period of time.
When a customer declares bankruptcy and has an outstanding balance with the bank, the loaned funds are often unrecoverable.
In certain instances, it is possible that banks are unable to locate a borrower. With no indication of whether a debt will be repaid, it is usually classified as a bad debt.
4. Unwilling to Pay
Certain bank customers may intentionally avoid their payments. Over an extended period of time this can result in bad debts for the bank.
5. Dissolved Business
Similar to personal bankruptcies, if a business that has a loan with a bank is dissolved or liquidated, the loans are generally considered unrecoverable.
Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into the meaning of bad debts. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What Is a Bad Debt With Examples?
A bad debt is an outstanding balance between a lender (usually a bank) and a borrower (individual or entity), where the borrower is no longer able or willing to pay the outstanding balance. Examples of bad debts include an individual that is no longer able to meet their mortgage payments, a business that has been liquidated and has an outstanding loan, a bankruptcy where a personal loan is no longer recoverable, and more.
Is Bad Debt a Loss or Expense?
In banking, bad debt is an expense. More specifically, it is called bad debt expense, because unrecoverable loans and credit are an expense to the financial institution in question.
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