The process employed by financial institutions, primarily banks, to identify, monitor, and resolve loans or advances that have defaulted or are no longer generating income, is critical to maintaining their financial health and stability. These loans, referred to as non-performing loans (NPLs), arise when borrowers fail to meet their repayment obligations for an extended period, typically 90 days or more. NPLs represent a significant risk to a bank’s balance sheet, as they tie up capital that could otherwise be used for profitable lending and investments.

The process begins with identification, where banks closely monitor their loan portfolios to flag accounts showing signs of distress, such as missed payments or reduced borrower cash flow. Early detection allows financial institutions to take proactive steps before the loan becomes a full-fledged NPL.

Once a loan is classified as non-performing, banks initiate a process of monitoring to assess the borrower’s financial condition, evaluate the reasons behind the default, and determine the likelihood of recovery. This stage involves regular communication with the borrower, reviewing financial documents, and conducting risk assessments. The goal is to understand whether the borrower is temporarily struggling or unlikely to meet obligations in the long term.

After monitoring, banks focus on resolution strategies to recover as much of the loan as possible. This may involve a range of approaches, such as:

• Loan Restructuring: Adjusting the terms of the loan, including extending repayment periods, lowering interest rates, or providing temporary relief to help the borrower get back on track.
• Debt Rescheduling: Renegotiating the repayment schedule to make it more manageable for the borrower, thereby improving the chances of recovery.
• Asset Liquidation: If the borrower is unable to repay, banks may seize and sell any collateral tied to the loan, such as property or equipment, to recoup losses.
• Legal Action: In cases where negotiation fails, banks may pursue legal action to recover the debt through the courts, which could result in garnishment of wages or other enforcement actions.

Throughout the process, banks also set aside provisions to cover potential losses from non-performing loans, a practice known as loan loss provisioning. This helps mitigate the financial impact on the bank’s balance sheet while they work to resolve the NPL.

Ultimately, the effective management of non-performing loans is essential for financial institutions to minimize losses, maintain liquidity, and ensure their ongoing ability to lend and invest. Proper identification, monitoring, and resolution of NPLs enable banks to manage risk and preserve financial stability.