Have you come across the term ‘bad loan’ and wondered what they mean? Let’s read ahead to find out what bad loans mean in banking terminology.
Learn More About: RBI Guidelines for Loan Recovery Agent and Process
Bad loans in banking terminology are generally known as Non-Performing Assets. Any loan repayment that has been delayed for 90 days or more is considered a bad loan. It is mentioned in the balance sheet of the bank.
Loans normally have a 90-day grace period, which means that EMI or interest payment can be delayed by a maximum of 90 days. Thus, if a payment is not made within this time frame, it is considered a non-performing asset.
Bad loans can be of various types, some of which are mentioned below -
Any EMI or interest payment that has been delayed for more than 90 days
Any credit card or overdraft facility account that has been non-operational for more than 90 days
Any short-term agricultural advance whose payment is late for more than two crop or harvest seasons
Any long-term agricultural advance whose payment is late for more than one crop or harvest season
As soon as banks recognize a loan as a bad loan, their first plan of action is to try and retrieve as much of the funds as possible. They might try to call and get the EMI to be paid. Other steps include trying to settle the loan with the borrower.
Eventually, they may also sell off the assets or collateral pledged by the borrower to retrieve the loan money.
Bad loans affect both the bank and the borrower. As for the bank, one or two bad loans don’t have a huge impact. If too many of their loans become non-performing assets, they may face perpetual losses.
As far as the borrower is concerned, even one missed EMI payment will have an impact on their credit score. Not repaying a loan for more than 90 days will have dire implications on their credit report. This will further make it difficult for them to procure loans in the future.
Bad loans in banking terminology are generally known as non-performing assets and they are harmful for both the lender and the borrower. This is why banks take documents and do thorough research on a customer before approving a loan.
As a borrower, you should always pay your EMIs on time as failing to so do may impact your credit history and creditworthiness. It is a good idea to calculate your EMIs before taking a loan so that you can plan accordingly.
In case you are falling short on funds to pay EMIs or are in a financial rut, you can opt for instant personal loans from moneyview to bail you out. You can get loans from Rs.5,000 to Rs.10 Lakh depending on your eligibility criteria. To know more, please visit our website or download the moneyview app.
A bad loan is also referred to as a non-performing asset.
Even though the terms are often used interchangeably, there is a slight difference between NPAs and bad loans. A bad loan is a loan where the borrower has not paid the EMIs for 90 days. A bad loan becomes an NPA when the borrower is in no condition to repay the loan at the current moment.
Most lenders use the five C’s to analyze an individual’s creditworthiness. This helps them understand if the loan would become a bad loan. The five C’s are - Character, Capacity, Capital, Collateral, and Conditions.
Bad loans occur when the borrower takes loans and is unable to pay them back. The causes may be personal like health emergency, or loss of a job. The causes can also be due to economic hardships in the market which causes more delinquencies.
Banks try to recover bad loans by selling off the collateral or even taking legal action.
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