Why Banks Fail To Recover Loans? [17 Reasons]

Why Banks Fail To Recover Loans? [17 Reasons]

Collateral itself never guarantees the repayment of the loan. Sufficient and coveted collateral is only an effort to get surety of loan repayment. For various reasons, loans may not be recovered despite having sufficient collateral. There is no scope to make a single person liable for this.

The dishonesty of the borrower, the bank’s carelessness, and socio-political situations are responsible for this.

These are discussed below:

Defective Feasibility Study

The loan project may be real but unprofitable. If the loan project is unprofitable, but the bank gives a loan against it, it may become a problem loan. So, a defective feasibility study is a reason for not recovering loan amounts despite loans against securities.

Lack of Adequate Supervision

If the securities/collaterals aren’t properly supervised, the dishonest borrower or employees of the bank may sell the collateral. In this case, collateral may be present in the paper but not in reality. This is another reason for the non-recovery of loans.

Lack of Skilled Bank Employees

Unskilled employees may convert a good loan into a problem loan because the unskilled employees will perform defective loan analysis and security and improper supervision. As a result, the loans have the chance to have defaulted.

Dishonesty of Bank employees

Dishonest employees aren’t careful and conscious enough to collect the loan amount. They may show negligence in several respects. This is also another reason for the non-recovery of bank loans.

Fake Securities

The bank should properly supervise and investigate the collateral so that the collateral will not be proven fake. The asset which the borrower presents as collateral may be non-existent or fake. The loan must default if the bank cannot explore the fake securities when providing credit.

Overvaluation of Securities

Dishonest borrowers may overvalue their assets to get a high amount of Ioan & if they default, banks don’t get actual value by selling those assets. In this case, also, the loan will default.

Uninsured Securities

If the securities aren’t insured, the bank cannot recover the value in case of any damage to those assets.

Inappropriate Securities

The bank shouldn’t accept any perishable goods as security. If these goods are perished or are damaged, the borrower will have the opportunity of defaulting on the loan.

Inadequate Securities

The bank should take the securities with an adequate amount to cover the loan amount.
6) Fall In the Price of Securities: Bank shouldn’t accept such assets as security, whose value may fall in the future.

Changing Price of Assets

If the price of the securitized asset may change frequently, then banks shouldn’t accept these assets as security.

Improper record of the securities

Securities and their values must be recorded properly. Otherwise, banks open themself to huge losses when the interest rate changes.

Fake Applicant

There may be no applicant presented in the loan application. So, the loan has a huge possibility of default. In this case, the securities of the fake applicant must be fake also. The bank should properly investigate the existence of the applicant to make sure about the securities.

Imaginary Project

The bank should properly investigate the project. Sometimes, there will be no project at all. That is, loans can be taken for imaginary projects. In this case, whether there is any collateral or not, the loan will default.

Excessive Trust

Some clients try to acquire the faith of the bank. In this respect, they take small loans and repay those before due time. Thus, eventually, they can present themselves as Ute trustworthy clients to the bank.

Later, by capitalizing on the bank officials’ excessive trust, they take a huge amount of loans by providing fake and misleading information.

Later on, these clients become defaulters.

Political Decisions

Sometimes political decisions may create non-recovery of loans.

Bureaucratic Favor

Sometimes high officials may give pressure on them not to recover the loan amount.

Sometimes, legal complications may arise in the sale of securitized assets, which can create non-recovery of loans.

A bank should identify the appropriate client and viable project rather than emphasizing the collateral. The Bank’s close supervision at the time of providing the loan and using the loan by the client will contribute directly in due regard.

Lastly, the banker should keep in mind that the borrower’s characteristics, ability to use the loan, and cordiality are far more important than collateral.

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