The amount of finance (loans extended) that is not recovered by a lender (e.g., a bank). In other words, it is considered bad-debts for the lender. Whatever the reason, a lender may not be able to recover part of the loans extended, in which case the amount nor recovered will be written off from the lender’s books of account.

Gross charge-off is a major factor in an entity’s credit risk exposure. Such risk has to be mitigated by reducing the amount of irrecoverable debts, as such amounts impact the profitability of an entity.

A net charge-off (NCO) is the monetary amount representing the difference between gross charge-offs and any recoveries of a delinquent debt that may take place later on. Net charge-offs refer to the debt owed to an entity that is unlikely to be recovered as of the time of reporting:

Net charge-off = gross charge-off – amount recovered