A problem loan is a kind of chronic disease for a bank’s financial health. Just as, when a person falls ill, the family and doctors strive to cure the illness and do not abandon the patient, similarly, if a bank identifies problem loans at an early stage and takes appropriate measures, many loans can be protected from turning into Non-Performing Loans (NPLs) or bad loans.

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Measures Required to Prevent Problem Loans

Careful Selection of Borrowers

Before lending, the borrower’s personal reputation, financial stability, business prospects, past repayment history and the quality of collateral must be thoroughly assessed.
Where necessary, the borrower’s business reputation should be verified through market intelligence activities.

Regular Loan Supervision and Review

After disbursement, financial statements, cash flow and business progress should be reviewed at fixed intervals.
Trends in repayment and changes in liquidity should be closely monitored.

Identification of Early Warning Signals

Failure to pay instalments on time.
Repeated requests for extensions of time.
Declining business income or the spread of negative rumours in the market.
Sudden reluctance by the borrower to communicate, or reduced transparency in transactions.

Risk-Mitigation Measures

Where necessary, recover funds through restructuring, rescheduling, or the realisation of collateral.
Establish a special monitoring unit for high-risk loans.

“Whoever takes a loan with no intention of repaying it is equivalent to a thief.”
— Al-Hadith

Definition of a Problem Loan

Bank loans are generally divided into two categories:

Standard Loan – repaid according to the agreed schedule and conditions.
Problem/Distressed Loan – not recovered according to the agreed schedule and shows irregularities in repayment.

According to the author:

“Problem Loans refer to those which the borrowers do not return as and when required, in spite of repeated reminders, and are not able to show any acceptable reasons for such failure.”

That is to say—problem loans are those which the borrower does not repay even after repeated reminders, or fails to provide reasonable and acceptable reasons for non-repayment.

Why Are Not All Loans Problem Loans?

Not all loans are standard, yet not all loans are problem loans either. At the time of borrowing, many borrowers possess both:

the intention to repay, and
the financial capacity.

However, circumstances may change over time:

Diminished intention – a developed tendency to wilfully avoid repayment.
Diminished capacity – inability to repay owing to business losses, market downturns, or personal financial crises.
Deterioration of both – i.e., negative changes in both intention and capacity.

Examples:

A businessman who was fundamentally honest but has become unable to repay due to unexpected losses in foreign markets.
A borrower whose business remains operational but who has, by personal choice, developed a habit of not repaying loans.

Classification by Type of Problem Loan

Intention to repay + Capacity to repay = Standard loan
No intention to repay + Capacity to repay = Problem loan
Intention to repay + No capacity to repay = Problem loan
No intention to repay + No capacity to repay = Problem loan

Real-World Statistics (up to June 1999)

Up to June 1999, the total volume of loans disbursed by all banks in the country stood at Tk 55,051 crore. Of this, non-performing loans amounted to Tk 20,711 crore and 1 lakh.

Sector-wise picture of non-performing loans:

State-owned commercial banks and specialised banks: Tk 19,240 crore 12 lakh.
Private banks: Tk 42,341 crore.
Foreign banks: Tk 1,239 crore 80 lakh.

Examples:

Sonali Bank: 9% of total loans are non-performing, amounting to Tk 5,154 crore 15 lakh. Of this, Tk 4,709 crore 94 lakh is bad loans, with little prospect of recovery.
Specialised banks:
- Bangladesh Industrial Credit Institution – 5% non-performing loans
- Bangladesh Shilpa Bank – 32%
- Rajshahi Krishi Unnayan Bank – 07%
- Krishi Bank – 33%

State of the commercial banks:

Agrani Bank – 63% non-performing loans
Rupali Bank – 32%
Janata Bank – 28%

From this it is clear—many state-owned banks are now facing an acute existential risk, and structural reforms by policy-makers are essential.

Good Loans vs Problem Loans

Good loans are desirable for every bank, as they enhance financial stability, profitability and credibility. Problem loans, by contrast, are undesirable and can cause capital erosion, reduced profitability and reputational damage.

The principal differences between good loans and problem loans are presented below:

No.	Area of Difference	Good Loan	Problem Loan
1	Meaning	Repaid in full, on time and in accordance with the agreed terms.	Fails to be repaid on time and is often classified as non-performing.
2	Quantum of Loans	The majority of a bank’s loan book is typically good loans.	Usually not more than one-quarter of total loans, though in some cases it may be higher.
3	Compliance with Repayment Schedule	Near-perfect timeliness, except for duly approved exceptions.	Partial compliance; repayment schedules are often altered without prior approval.
4	Nature of Clients	Reputable, creditworthy and financially capable clientele.	Frequently less reputable and higher-risk clients.
5	Sanction Transparency	Sanctioned in accordance with policy and procedure.	Often sanctioned by overlooking policy due to recommendations from relatives, friends or influential individuals.
6	Nature of Terms	Generally conventional and implementable terms.	Terms are often new, complex and onerous.
7	Credit Analysis	Suitable borrowers are selected through thorough analysis.	Inadequate analysis leads to selection of unsuitable borrowers.
8	Taking Bold Steps	The bank takes appropriate actions when required.	Political pressure or interference from influential quarters results in inaction.
9	Supervision Intensity	Continuous and well-defined monitoring.	Absence of effective supervision or merely a token process.
10	Security (Collateral)	Adequate and reliable collateral.	Inadequate or unacceptable collateral.
11	Profit–Loss Impact	Transactions contribute to increased profitability.	Transactions contribute to rising losses.
12	Communication	Cooperative and regular communication—letters, telephone or in-person meetings.	Reluctance to communicate; uncooperative behaviour.
13	Financing Structure	Balanced capital structure appropriate to the enterprise.	Imbalanced mix of debt and equity, with undue long-term investment in fixed assets.
14	Resilience to Adverse Conditions	Prior preparedness for natural disasters and economic downturns; capable of navigating crises successfully.	Lack of preparation leads to frequent failure in crisis management.
15	Need for Legal Action	Differences are resolved through discussion; litigation is unnecessary.	Unwilling to negotiate; legal action becomes inevitable.