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Problem Loans (NPLs)

Problem Loans (NPLs). Loan Review. Examination of Outstanding Loans to Make Sure Borrowers are Adhering to Their Credit Agreements and the Bank is Following Its Own Loan Policies. Loan Workouts. The Process of Resolving a Troubled Loan So the Bank Can Recover Its Funds. Loan Workout Process.

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Problem Loans (NPLs)

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  1. Problem Loans (NPLs)

  2. Loan Review • Examination of Outstanding Loans to Make Sure Borrowers are Adhering to Their Credit Agreements and the Bank is Following Its Own Loan Policies

  3. Loan Workouts The Process of Resolving a Troubled Loan So the Bank Can Recover Its Funds

  4. Loan Workout Process • Goal is to Maximize Full Recovery of Funds • Rapid Detection and Reporting of Problems is Essential • Loan Workout Should Be Separate From Lending Function • Should Consult With Customer Quickly on Possible Options • Estimate Resources Available to Collect on Loan • Conduct Tax and Litigation Search • Evaluate Quality and Competence of Management • Consider All Reasonable Alternatives

  5. 3 Key Areas in Problem Loans • Causes of problem loans • Detection of problem loans • Remedial management (loan recovery methods) Objective: 1. To work towards a loan payout with maximum recovery

  6. Problem Loans and the Recovery Process Prevention Detection Gathering Information Analysis Action Plan Negotiated Workout Obtaining Judgment Liquidation of Collateral Executing Judgment Payout Payout Payout

  7. Problem Loans and the Recovery Process • Banker’s main objective is to obtain full payout (principal sum and interest element) • If payout fails to follow normal course of repayment, then through legal process • Consequences: • To obtain full recovery plus interest • To maximize recovery rate with minimal cost at shortest time possible • Becomes unattainable

  8. Causes of Problem Loans • Lenders errors: • Failure to know borrower and understd his business • Failure to obtain sufficient info prior to making initial loan decision • Failure to know the degree of realisability of collateral and valid documentation • Failure to supervise utilisation of loan proceeds • Lack of adequate follow-up procedures • Failure to recognize early symptoms and adverse signals or “red flags” • Slow in the negotiation process

  9. Lenders errors 8. Over generosity 9. Neglect of details 10. Inadequate assessment of mngt depth of borrower 11. Breach of basic lending principles 12. Ignorance of impact of an economic cycle 13. Too “collateral oriented’ rather than “cash flow oriented” 14. Lack of knowledge and skills – sophisticated running of business

  10. Warning Signs of Problem Loans • Unusual or Unexpected Delays in Receiving Financial Statements • Any Sudden Changes in Accounting Methods • Restructuring Debt or Eliminating Dividend Payments or Changes in Credit Rating • Adverse Changes in the Price of Stock • Net Earnings Losses in One or More Years • Adverse Changes in Capital Structure • Deviations in Actual Sales from Predictions • Unexpected and Unexplained Changes in Deposits

  11. Detection of Problem Loans (Red Flags)

  12. Remedial mngt (Loan recovery) • If borrower is not in severe difficulty, the banker should first attempt to negotiate for a loan workout without resorting to taking legal action • Banker should opt for immediate legal proceedings and liquidiation of collateral if: • Bad management problem • Suspicion of fraud • Deterioration in value of collateral • Non-viability of core business, • Time limitation factor

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