Problem loan: The loans which cannot easily be recovered from borrowers are called Problem loans. When the loans can’t be repaid according to the terms of an initial agreement or in an otherwise acceptable manner, it will be called problem loans. There are dissimilar opinions regarding whether or not a loan will be called problem loan if the borrower has an appropriate cause for the non-payment. Let’s consider the following four scenarios:
Loan classification may be shown in the following ways:
- Unwillingness to repay + Ability to repay = problem loan
- Willingness to repay + Inability to repay = problem loan
- Unwillingness to repay + Inability to repay = problem loan
According to the author, “problem loans refer to those which the borrowers do not return as and when required in spite of repeated reminders and are not able to show any acceptable reasons for such failure.”
Problem loans pull out the loan cycle, and the bank misses opportunities to expand loans to many possible customers. So, it requires close regulation and in some cases need legal actions. Problem loans must be identified early because they can affect profitability. Maximum supervision is necessary. Hence, the supervision cost is high. Banks manage problem loans through loan workouts.