Non-performing loans are the ones in which if the borrower fails to payback, he is not called a defaulter because non-performance was mentioned in the contract. The interest rate keeps adding up on his loan and the bank keeps in touch with him. Whenever he has the money to start paying off, the repayment is conducted.
|
|
Banks follow a set of rules to declare a loan non-performing. There are guidelines set up by the Revenue and Customs department. There are usually two categories a loan can fall under and be declared non-performing. Criteria set up for this purpose may include the borrower’s financial position and prospects, the value of any security held as collateral, the borrower’s repayment history, and the costs that would be incurred in obtaining repayment.
Loans are an important part of a bank’s business. Making sure all the debts are paid on time and monitoring of debts are very important. Even though banks try their best to ensure loans are paid off, some loans become impaired and are not repaid. A bank takes a risk when it issues a loan to a customer with less than perfect credentials. The bank has to satisfy all the parties concerned such as customers, creditors and investors that it has a strong monitoring system in place to minimize the risk of non-performing loans. A bank’s reputation relies heavily on these monitoring procedures. A report to the bank’s shareholders includes details of these procedures.
Hindrance to Economic Stability
Non-performing loans are considered to be an impediment in the way of economic stability. Today, a number of methods are taken up for preventing the economy from these loans and restricting the fast growth of non-performing loans. Why Do Non-Performing Loans Still Occur?
Companies that are especially in the business of real estate, industry, wholesale, retail, and construction borrow heavily for land and machinery if they find a decline in the value of the land and other heavy assets. It is obvious that no one would continue to buy off or pay for such an asset that has seen a big decline in its value.
Another concern is the business for which the loan is taken not working out. When the company takes up a heavy loan and cannot benefit from it, they simply don’t pay it.
Financial institutions at times borrow money from banks to give out as non-performing loans. If the loan is not recovered, they obviously don’t pay the amount to the bank. They themselves go bankrupt but the bank suffers the loss.In the past decade, these non-performing loans have caused a decline in the banking structure and their reliability for their customers. Therefore, governments of different countries now avoid giving these loans to their clients.
Related Articles: