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Dealing with Bad Loans? Here’s Some Help

The rising number of bad loans has been a burden on financial institutions and the economy.The gravity of the situation can be gauged from the fact that the Government of India had to announce a bank recapitalisation plan of Rs. 2.11 lakh crore last year to address the state of affairs.

Recent cases of high-profile frauds have fuelled the debate as to whether the system is robust enough to deal with the menace or not. As we head into the 2019 general elections, here are some ways through which the situation can be dealt with ease.

 

1. Discuss the situation with the defaulter

The belief among defaulters,of financial institutions harassing them, often complicates the situation. In such a scenario, it’s in the best interest of both parties to come to the table and discuss the matter. A sudden layoff, medical emergency or a loss in business can strain the finances of an individual, leading to a default.

If the case is genuine, taking a lenient viewof the situation can help ease matters and allay fears of the defaulter. The objective of such a discussion is to chalk out a middle path benefitting both parties. Instead of sending a strongly worded letter or email, the approach should be to invite the borrower for a candid discussion.

 

2. Reset the terms and conditions of the loan

A prudent way to deal with bad loans is to reset the terms and conditions of the loan. For example, if the defaulter has a strong case, where he/she is unable to repay the outstanding dues, little tweaks in the terms and conditions of the loan can reap rich rewards.

For example, the tenure of the loan can be increased, or the rate of interest can be lowered to give the defaulter much-needed breathing space. Also, the moratorium period, the period where the borrower isn’t required to make any repayment, can be increased to help the defaulter get his/her finances on track.Often on resetting the terms and conditions of the loan, defaulters get the much-needed time to pay off the outstanding dues.

 

3. Integrate technology in the loan approval process

If financial institutions can identify potential defaulters during the loan approval process, the challenge can be nipped in the bud. This is possible by integrating technologies such as artificial intelligence and machine learning, both of which are gaining traction in the lending space of the country.

These technologies offer insight about an individual’s spending patterns along with social quotient, thus helping underwriters in better risk assessment. There are many tech firms offering such services and it’s in the best interest of financial institutions to seek professional help in the loan approval process.

Recovering bad loans is a time-consuming process. While some may suggest selling the collateral of the borrower, taking that route isn’t ideal as it involves a lot of nitty-gritty. At the same time, it may be difficult to find a taker of a property that belongs to a defaulter.