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.
Problem loans can be handled in different ways such as:
- Taking legal action through the court,
- Banks own steps in relation to problem loans.
These are shown below:
Taking Legal Actions through the Court:
If the bank finds no way to handle problem loans, then the bank goes for taking actions to handle it. This can be done in two ways:
- General recovery suit: When bank finds that the borrower has the ability to repay loan but s/he has no interest to pay, at first bank tries to resolve the matter by mutual discussion but if it fails then the bank goes for general recovery suit to collect the loan along with the expenses of suit front the borrower. In this Case, the borrowing institution pays the amount declared in the verdict.
- Recovery suit by liquidation: In this case, the borrowing institution is really unable to repay the debt. When the borrowing organization becomes bankrupt, the bank along with all the creditors may go for recovery suit through liquidation of the borrowing organization. In this case, the net asset of the borrowing company is smaller than the net claim of the creditors. Court employs a liquidator or receiver. This liquidator distributes the proceeds from selling the assets of the company to all the creditors proportionately.
Steps by Bank itself: In this case, the lending bank can take some steps to handle problem loans, and they are –
Preventive steps involve identifying the cause of problem loans and taking the necessary steps to control it. These steps can be of two types –
- General preventive steps,
- Steps for specific problem loans.
However, a bank can take the following steps to handle problem loans:
Discussion & advice: At the end of the meeting, if any problem arises on the part of the borrower, a bank will provide appropriate advice regarding that problem.
An arrangement of new loan: Bank may also arrange new loan the borrower to increase the ability to repay the loan.
Additional collateral: Additional collateral is required when the value of the previous collateral has decreased.
The advice of inventory control: In most of the cases, inventory is either kept in raw materials from or in semi-fished or finished goods from. If inventory level is higher, a huge amount of money is tied in that in that inventory. Banks may advise the borrower to control the inventory level in such a way that a huge amount of money is not kept idle.
Accountability of the loan officer: Banks must ensure the accountability of the loan officer to his/her superior. Every loan officer must perform his/her duty according to the established loan policy. Then, he/she informs the superior about the progress.
Limit based loan: According to the loan policy, banks have specific limits for a specific type of loans. The loan officer should not cross this limit.
Discouraging loan to directors: If not mentioned in the loan policy, it is better not to sanction loans to the directors.
Not making a loan without proper credit analysis: Banks should not make a loan without confusing proper credit analysis.