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 the initial agreement or in an otherwise acceptable manner, it will be called problem loans.
Curative Steps: In order to control problem loans, banks need to be very careful about the financial discipline of the borrowing organization. Banks can undertake the following steps in order to get rid of problem loans:
(i) Adjusting financing structure: If the firms are using much debt in their capital structure, the bank will encourage them to use more equity financing rather than debt financing.
(ii) Additional loan facilities: The bank will prove additional loan facilities in order to help the firm to recover from its present crisis. If the firm can recover now, it will be able to repay the banks previous loan along with this additional loan.
(iii) Change of repayment schedule of loan: Sometimes, a borrower may be unable to repay the loan installments according to his/her cash flow pattern. In this case, if the bank changes the repayment schedule in favor of the cash flow pattern of the firm most of the problem loan borrowers will be able to make the repayment.
(iv) Correction of loan diversion: If banks find that the reason of problem loan is urination of loan in an unproductive sector by the borrow, then to cure the problem loan, banks need to correct the loan diversion.
(v) Exemption or deferment of due installments and interests payment: Banks may exempt or defer due installments and interest payments of an honest and reputed borrower. This may make the borrower a long-term loan client of the bank.
(vi) Rationalization of client’s overhead expenses: Banks may advise the clients to reduce their overhead expenses, Banks also guide the problem loan to reduce unproductive and unnecessary the loan.
(vii) Advice to merge: To minimize the loss, the client may be advised to merge with other big organization. The combined company may be able to repay the debt.
(viii) Advice to temporarily defer modernization &expansion plan: Banks may advice to temporally defer modernization and expansion plan of the organization. This will help improve the liquidity position of the Client, which will ultimately help to repay the loan.
(ix) Advice to change the credit policy of the firm: If a firm may arise. In this case, the bank may suggest changing the credit policy of the firm. By changing credit terms; the firm may be able to repay the loan.
These are the way by which the bank can handle a problem loan.