Negative contribution of banks for the growth of bad loans or Non-performing assets
The following are some of the reasons how banks are responsible for the growth of bad loans or non-performing assets.
1. Undue anxiety to increase the income
The bank’s credit portfolio is usually the most important revenue generating asset. Bank may be inclined to give the earnings factor more importance than the soundness of business proposition and with the result the credits carry undue risks. Unsound loans usually cost more than the revenue they produce.
2. Compromise of credit principles
Bank may grant credit that has undue risk or unsatisfactory terms with full knowledge of the violation of sound credit principles. The reasons for compromising such principles may be timidity in dealing with individuals with influential connection.
3. Incomplete Credit information
Complete credit information is absolutely necessary for determining borrower’s financial position. The lack of supporting credit information (for example, purpose of the borrowing, business plan, source of repayment, progress reports) is an important cause of problem credits.
4. Failure to obtain or enforce repayment agreements
Sometimes banks fail to obtain or enforce repayment agreements. Such failure cause problem loans.
As the saying goes, complacency or carelessness is the cause for accident. Complacency results in poor monitoring and control of established or familiar borrower. Acting on oral information provided by the borrower instead of reliable financial data and optimistic interpretation of known credit deficiencies based on past achievements are fraught with risks.
6. Follow-up deficiency
Many credits that were initially sound deteriorate in quality because of ineffective monitoring and follow-up by the bank. This deficiency may arise due to lack of knowledge of the borrower’s business or the terms of the credit by the officials of the bank.
7. Technical Competence
The technical ability to analyze financial statements and to obtain and evaluate other credit information is a requirement for all bankers. When this ability is weak or absent, unwarranted credit losses are certain to occur.