Often loans are lent to customers by banks and it is a win-win situation for both. However, there is a strong possibility that borrowers can default at some stage when it comes to paying the loans despite having signed an agreement. In a problem loan, usually, the borrower has skipped one or more payments which was promised or that the value of a collateral that was pledged behind the loan had fallen drastically.
If a borrower defaults on payments, banks or other financial institutions may not offer a loan to them in the future. Occurrences of defaults are increasing by the day, and as a result, close monitoring of problem loans becomes essential. In extreme cases, problem loans need legal intervention as well. Apart from liar loans, one of the major factors attributed to the 2008 financial crisis is the increase in the number of problem loans during that period. Understandably, the bank would face a liquidity crisis because their entire cash flow plan goes for a toss, creating a doubt in the mind of the depositor.
Sometimes it is tricky to identify a problem loan as the borrower may actually have a valid reason for defaulting on payment. A loan can’t be called a problem one if the borrower is capable enough to pay as soon as the default is pulled out, even though they have missed one or more due payments.
Loan officers and other credit professionals must be able to identify it at the earliest and take appropriate action. Otherwise, the profitability of the bank or the financial institutions get affected to a large extent and that, in turn, hurts the economy. In some instances, it becomes necessary for the lender to be supportive of the borrower by offering them ways that can make it easier to kill the loan by paying it off in installments for example.
The reputation of the financial institution also matters. If it is slow to identify and follow up on payments, the borrowers are likely to take them for granted. The lenders need to be strict when required, as this is serious business.
There can be many indicators of a problem loan such as preparing irregular financial statements, an abnormal increase or decrease in large size deposit withdrawals, avoiding communication with the lender, and so on. The lender must identify these factors in order to prevent a problem loan.
To deal with the problem loans efficiently, it is necessary for banks and other financial institutions to differentiate between a loan that can’t be paid and won’t be paid, in lieu of the rules and procedures of the institution.
If the loan can’t be paid, then the borrowers must look for alternate sources that can help in repaying it. To someone who won’t pay, having collateral is a must to fall back on and legal action through the emolument attachment order or garnishee order must be taken.
