Question

1- discuss some credit quality problems faced by financial institutions.

Answer 1

credit quality problems faced by financial institutions are :

1) Problem of non performing asset (NPA) :

Whenever a financial institutions (banks) gives credit to any firm, many risk are attached with it. One of the major problem for banks is NPA. It arises when borrower default to pay the notional amount and the interested associated with it. This is a direct loss for the banks as they directly eliminate the capital and demand for more infusion of capital from central bank. It lowers the credit quality of bank and it lowers the capability of a bank to give more credit, thus effecting there performance.Whenever a financial institutions (banks) gives credit to any firm, many risk are attached with it. One of the major problem for banks is NPA. It arises when borrower default to pay the notional amount and the interested associated with it. This is a direct loss for the banks as they directly eliminate the capital and demand for more infusion of capital from central bank. It lowers the credit quality of bank and it lowers the capability of a bank to give more credit, thus effecting there performance.

2) Problem of fund diversion :

Many firm divert the loan they get from the bank to some other activity which is not specified in loan agreement. This lowers the credit quality of a bank as they give loan after accessing the risk associated with request and if fund is used for different purpose then there are high chances that the risk might increase. Many firm have diverted the loan amount to shell companies and fro there it is diverted for some other purposes.

3) Govt. pressure to fund specific sector also lowers the credit quality of a bank. In many country government has some control on banking sector and government in order to fulfil its objective ask bank to fund projects which gives less return than it would have got if bank would have invested in some other projects. It impacts the profit for the bank

4) If timely repayment of intrest is not payed to bank for the outstanding loan then it can also be considered as lowering of credit quality