Question

Discuss the factors that have led to the increas in loan default rates and the solutions

Answer 1

Various reasons can be attributed for this state of affairs. Following are some of the reasons found by way of experience over around four decades of handling credit portfolio.

1. Improper identification of borrowers through various enquiries and references including spot inspection and enquiry with the neighbors etc.
2. Poor appraisal due to lack of knowledge in credit appraisal.
3. Absence of any monetary contribution from borrower including self labour.
4. Inflated invoices/cost estimates accepted as it is without proper enquiry.
5. Lack of good knowledge on the part of the borrower particularly in finance area about the unit to be started.
6. Financing against the third party security in which case the borrower will not have full responsibility/interest on the unit.
7. Over valuation of collateral security by panel valuers in collusion with the borrower.
8. Absence of periodical inspection of the unit by the Bank personnel for review.
9. Non submission of audited financial statements by the borrower.
10. Diversion of loan amount or income from the unit/business to other purposes by borrower without repaying Bank loan.
11. Dealing only in cash to avoid transaction through the Bank.
12. Wrong propaganda by the politicians not to repay the loan or hollow promise of waiver of loans to affect the repaying ethics of borrowers
13. Long and protracted litigation pending in the Courts.
14. Willful default on the part of the borrowers and then strive to close with one time settlement to get big waivers/write off.
15. Lack of legal knowledge and vigilance angle on the part of the Bank personnel