This paper provides a formal model that investigates the optimal timing for banks to write-off their non-performing loans. The motivation comes from the recent episodes of Japanese banks, which have been slow to clean up their non performing loans in the wake of the collapse of the "bubble economy" in early 1990s. A real option approach is assumed to arise from the following sources: (i) the re-investment return from freeing up funds by write-offs, (ii) the liquidation loss, (iii) the possible implementation of a subsidy scheme, and (iv) the reputational repercussions from not writing off their non-performing loans immediately. This paper attaches particular importance to the uncertainty from the possible implementation of subsidy scheme to explore its desirable features. Also, the paper examines the possible role of monetary policy in boosting the banks' incentive to write off.