Problem loan or classified loan refers those loans that have pushed the bank’s financial position at stake usually due to the fact that, the borrower has missed one or more scheduled loan payments or the collateral behind the loan agreement has significantly declined in market value overtime. As we know, in granting loan each bank follws a specified a loan policy set out by the top officials in the bank. The loan applications are reviewed and the loan committee in the loan department tries to find out whether the loan application match the standard set the by bank for granting loan in terms of financial viability, maturity, types of loan applied for, nature of collateral promised to be pledged etc. after sanctioning loan bank’s credit department tries to establish a super visionary activity for the loan disbursed. Despite all of these safeguards most bank end up with situation where some of its loan granted becomes problem or distressed loan.
Definition