Nonperforming loans are those that borrowers
are no longer making payments on. Generally, a loan is considers as NPL, if its
not paid or renewed at maturity, due-date or expiry date. A non-performing loan
is the loan that is close to be default or is in default.
Reasons for NPL
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Pre Sanction Part:
◊
Selection wrong borrower
◊
Lack of collateral
◊
Lack of succession
◊ Thin Margins.
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Post Sanction Part:
◊Liquidity question
◊Adverse business and employment
conditions
◊Insufficient collateral
◊Insufficient income
◊Payment of interest and principal may
have been renegotiated or restructured.
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Indicators of Non-Performing Loan:
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§ Slow or Negligible
turn-over in A/c
§ Frequent request for
excess over-drawing without availability of funds in A/c.
§ Irregular payment of
overdue installment
§ Delays in submission
of stock statements
§ Delay in compliance
with the requirements of loan documentations
§ Diversion of funds
§ Delay in
implementation of project schedules
§ Current liabilities
exceeds current assets
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§ Un-impressive
financial statements
§ The borrower is not
traceable
§ Particulars of
borrowers properties are not available
§ Upon request of the
Bank, the borrower expressed inability to pay or does not respond.
§ The borrower has died
§ Documentations are
irregular or security is insufficient or not properly charged
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Legal & non-legal
measures to recover a NPL
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Non-Legal Measures:
1. Review all
documentation, meet the customer, and prepare a Classified Loan Review
Report.
2. Letter, Follow up
& Persuasion over phone, Group visit by team member.
3. Letters to Guarantor,
Employer, and Reference all above effort follows.
4. Final Reminder &
Serve legal notice
5. Letter to different
banks/Association
6. Repossession starts
& Legal proceedings begin.
7. An incentive package for bank officials of NCBs to speed
up the recovery of bad loans
8. Rescheduled Loan as per Bangladesh Bank reschedules
guideline.
9. Compromise proposal, debt Restructuring Debt
Securitization, Rescheduling and rehabilitation measure
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Legal Measures:
1. Suits filed to Artha
Rin Adalat.
2. Suits file at bankruptcy court as per the Bankruptcy Act and the PDR Act.
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Impact of nonperforming loan on financial health of bank:
Accrued
interest is suspended.
Provision
has to be made from other income
Interest
has to be paid to the depositors.
Bank
cannot recycle the scarce
resource
Bank
faces liquidity problem
Bad
impact on rating of the Bank.
Bangladesh
Bank may impose restriction on disbursement of further loan.
Bank
cannot pay dividend , bonus etc.
Calls
upon reputation of the Bank.
People
lose confidence on Bank.
Require
more capital for NPL.
Bangladesh
Bank may declare it a problematic Bank
and depute observer in the Board
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Why does an advance become sick
Wrong selection of borrower.
Defective Appraisal
Defective documentation
Unethical disbursement
Lack of supervision/monitoring &
follow-up
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Stuck up loan:
Stuck up loan is one repayment of which is uncertain due to
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Reasons of stuck up loan
Wrong
selection of borrower and business
Wrong
assessment of actual credit need /dose and repayment time.
Wrong
structuring & securities
Wrong
risk analysis
Defective
documentation
Credit indiscipline
Covenants
not complied.
Fund
diversion
Weak
internal control /Audit.
Proper
nursing of the loan not made by the bank.
Early
warning signal not in place.
Timely
action not taken.
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Strategy for regularization stuck up
loan
Meeting with the customer
Negotiation for restructure
Rescheduling
Settlement by way of extension of time
Waiver of partial interest
Serving call back notice
Foreclosing mortgaged property
Taken legal measures
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