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MFI/Bank ABC estimates that 1% of loans amount that is $ 1000 will never comeback. So this $ 1000 is ABC MFI's/bBankBank's loan loss reserve and it records this amount as negative number on the asset portion of its balance sheet.If and when MFI/Bank ABC decides to write all or a portion of a loan off, it will remove the loan from its asset balance and also remove the amount of the write-off from the loan loss reserve. The amount deducted from the loan loss reserve may be tax deductible for MFI/Bank ABC.
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