Problem Loans – How to Catch Them in a Timely Manner

Banker Resource
June 13, 2013 — 1,390 views  
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Running or even holding an important position in any financial organization requires an individual to have a keen eye on being able to spot trouble and deals, which could do more harm to the company than good. Problem loans are one of the biggest issues faced by financial companies all over the world and seriously undermine any profits that a company is making. A problem loan is essentially a loan that is no longer returning any principal or even interest payments. The fact that a company is no longer making money on the loan classifies it as being a ‘problem loan.’

Key Indicators of Problem Loans

Being able to correctly identify a problem loan will go a long way into helping your business steer clear of financial losses. For this to work efficiently, two or more departments in the organization need to work together. This usually involves the lending department as well as the administration team. Primarily, a lot of attention needs to be given to the trends in the business to which the money has been loaned. Look for declining sales, gross margins, any increase in operating expenses, as well as slower inventory turns and receivables.

The analysts of your corporation need to also keep an eye out for an increasingly heavy reliance on short-term debt as well as an increase in financial leverage and declining liquidity trends.

In order to be able to analyze this data, it is important to ensure that a streamlined system for flow of data is developed. Regular collation of data is essential to identify a problem loan. Experts also say that potential problem loans usually develop into the evil that they are well before the implosion. Defaulting payments are usually one of the best indicators and will generally develop a few months or even years before regular defaulting is encountered.

Remedy Options for Problem Loans

As with all financial transactions, once a problem loan has been identified, steps must be taken to rehabilitate the loan. In many instances, it is easy to get emotional about loans and credits that become delinquent. However, the decision needs to be professional in order for your organization to maintain its growth patterns. Plans can be drawn up to save the problem loan by offering the borrower to liquidate with his or her co-operation, without his or her co-operation, or even repair the problems with the loan.

Problem loans are something that you need to keep an eye out for as they can cause significant damage to your financial firm. Regular data analysis and risk management is essential to eradicate the risk. However, it is important to remember that with clear discussion and foresight, problem loans and potential problem loans can be fixed to ensure that it does not affect either party. At some point, to prevent the problem debt from being a total loss, you might have to – as a business – take a call and even see if discounting the debt will help solve the financial difficulty of the borrower, enabling him or her to pay back some of the outstanding amount.

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