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.
If the loan can be identified earlier as problem loans before it actually happens, regulating monitoring along with some other measures can prevent the loans from being problems loans. For identifying the “potential” problem loans, we have to know the symptoms of a problem loan.
The symptoms of problem loans can be classified in the following way:
- Quantities Indicators
- Qualitative Indicators
- Sudden death or accident of chief executive of the business.
- Avoiding communication with the lending bank.
- The borrowing organization is not operating smoothly due to some conflicts’ among the executives and among the board members.
- Bitter relationship between borrower and lending bank.
- An occurrence of theft, fraud, robbery and/or hijacking in the organization of the borrowers.
- Conflicts among the heirs of the owners of the borrowing organization.
- Pretending in the manner that payables are paid.
- Financial reporting is frequently “down tiered” due to changes in financial management.
- Delayed responses of financial transaction.
- Suppliers cut back terms or request cash on Delivery (COD).
- Distribution or production methods become obsolete.
- The company has grown dependent on trouble customers or industries.
- The board of directors is no longer active in making crucial business decisions.
- Lack of depth in managerial decision making.
- Financial control mechanisms are weak.
Qualitative indicators provide valuable information to the bank about the problem or make repeat requests of increasing or deferring the installment date. After getting this preliminary indication, banks may seek information regarding the above mentioned quantitative factor. Then, the bank can be certain about the problem loan.