In this connection, we would like to share some ideas on not only how to manage and monitor your bank’s loan portfolio but more specifically addressing how to protect your loan portfolio before problems arise and issues once loans become a problem, and when necessary, ways to reclaim the collateral assets securing them. In addition, we aspire to provide you with the essential strategies that may be used for loan recovery once a credit becomes a problem and when a debtor enters bankruptcy including protection against lender liability.
First of all, let us define a problem loan. Basically, it is one where repayment is in jeopardy, especially if the expected or anticipated source of repayment is no longer sufficiently available to repay the debt. Put another way, a problem loan can be defined as one where there has been a default in the repayment agreement resulting in undue delay in collection or in which there appears to be a potential loss.
Virtually all banks sustain problem loans; the key is to minimize the loss. Certainly reasons for nonpayment include business losses; declines in liquidity or working capital; overtrading, (excess merchandise purchased on credit, remaining unsold and or overstocked, out of date, stale, perishable, and or no longer useful, no longer fashionable, and burdening of longer inventory turnover); failure on the part of the borrower to properly maintain good cost accounting systems, and improperly perform under contracts or other commitments; non-receipt of cash receipts regarding account debtors and clients payments, or from third-party customers or those in bankruptcy; death or major injury to a manager or other key people in a company; errors and or omissions, which may include fraud, casualty losses, shrinkage and theft (goods going out the back door).
