One major problem which the banks in India are facing is the problem of recovery and overdue of loans. The reasons behind this may vary for different financial institutions as it depends upon the respective nature of loans. Here an attempt is made to find out the some causes of default of loans due to which financial Institutions are facing the problems of overdue of loans. The recovery officers of different banks are interviewed for finding out the causes of defaults. These reasons may be useful for the and Banks for the better recovery of loans in future. After surveying different banks, the following can be said to be some of the main causes of default of loans from industrial sector:-
- Improper selection of an entrepreneur: Selection of the right Entrepreneur is one of the major factors in the profitability of Banks. Two major criterion namely the intention to repay and the capacity to repay should be properly dealt with in Credit Evaluation. The entrepreneurs who have the willingness, capabilities, qualities and the requisite expertise for successfully setting up and running an industrial unit, should be identified with proper prudence and judiciousness. This is the best way of safeguarding the investment of a bank, thereby ensuring proper and timely repayment. Unbiased survey reports of the site and capability of the Entrepreneur must be verified by the surveyor. In other words the credit worthiness of the entrepreneur as well as the project should undergo very careful scrutiny before the sanctioning of the loan. Strict measures and security should taken before the sanctioning of the loan.
- Deficient analysis of project Viability: One of the important reasons for poor recovery of loan is attributable to wrong selection of projects. Success of any project depends upon the viability of the project, and the viability in turn, depends upon the easy availability of raw material, transportation, railways, skilled labour, communication facilities, markets etc. If any of the above is not easily available to the entrepreneur it results in an increase in the cost of the project and also in delay of production. This inevitably causes default in repayment of loans. There are many examples where the banks accede to finance projects deficient in one or more of these areas. In usual practice, when an entrepreneur approach for a loan he presents his project in such a way that no one can easily comprehend the non-availability of the primary prerequisites. All the weak points are camouflaged and only strong points of the project are highlighted.
- Inadequacy of Collateral Security/Equitable Mortgage against Loan: Collateral Security by way of mortgage of immovable property or other fixed assets, thereby creating a charge, trains the mind of the borrower to be prepared to pay the dues to the lenders. But when he is free from this fear of losing his encumbered asset in the event of his defaulting in the payment of dues to banks, he often takes the liberty, and tends to weigh the pros and cons vis-à-vis default. Security against loan, though at times may fall harsh on the borrower, serves a worthwhile purpose in that it creates promoters’ stake in the borrowers and thus, disciplines the borrower to be more committed in paying the dues to Banks.
- Unrealistic Terms and Schedule of Repayment: Occasions are not few when there develops a tendency on the part of the financers to paint a rosy picture of the project at the time of appraisal. If the sanctioning authority is guided by considerations of personal interests, many things may happen. The breakeven point of a project may be shown at an unrealistically low level of operation, or profitability may be shown at an unduly high level just to brighten the chances of acceptability of the project by the financial institution; or cash inflow may be shown in an unduly optimistic manner and, therefore, Debts Service Coverage Ratio (DSCR) worked out incorrectly, fixing unrealistically high installments and conservative schedule of repayments. These inner pulls and pressures may find reflection in fixing excessive amounts of installments in order to show an early period of repayment. The borrower at this stage finds himself in an unenviable position of a ‘Yes Master’ and nods his head at whatever conditions are attached or whatever repayment schedule is fixed by the financial institutions, in all probability, covering up his design to evade payment of the future dues. And, the real problem surfaces when repayment of installment/payment of interest falls due and the borrower conveniently and blissfully ignores calls for clearance of the said dues, not so much due to his intention to defraud the loans, as due to him already bleeding white to keep his concern going.
- Lack of Follow up Measures: “A stitch in time saves nine”. Follow-up measures taken regularly and systematically keep the borrowing unit under constant vigil of the banks. Many ills can be checked through such follow-up measures by keeping the borrowing units on their alertness and guiding them to rectify their mistakes in the first opportunities or extending them a helping hand in tiding over their tight times. Normally, such close follow-up programs are conspicuous by their absence. In the result, the borrowing units not only ignore payment of their dues to banks but also often tread on wrong tracks, much to the detriment of their own financial health and that of the banks. Performance of the borrowing units, if carefully and systematically monitored through regular inspections by scrutiny of returns, annual balance sheet and inspection of site, can be significantly improved. Naturally, such inspections prevent the borrowers from deviating from the terms and conditions of the loan or from diverting any fund for purpose other than those earmarked in the sanction letter and keep the financial health of the units in good order.
- Labour problems: The labour situation in India can be broadly classified into two categories namely availability and welfare related problems. Skilled labour is in shortage for many specialized industrial units particularly because of the geographical situation of such units. Shortage of labour results in unwarranted deceleration of production thereby hampering the profitability of the concerned unit. On the other hand labour welfare is grossly neglected by industrial units leading to a feeling of dissatisfaction and disgruntlement among the working force. However, it would be pertinent to mention here, that there are numerous instances where political and vested interests tend to instigate labour problems.
- Default due to natural calamities: A certain proportion of default can be attributed to natural calamities such as floods, earthquakes, storms, etc. Prima-facie this would seen to be a factor beyond human control. A more detailed insight, would however, suggest that certain precautionary preventive measures such as proper meteorological and topographical analysis of the industrial sight can go a long way in reducing this element of risk. Natural calamities not only affect the unit directly but also exert additional burden on the Government in terms of relief measures, waivers etc. A further fraction, albeit nominal, is of such borrowers who tend to take undue advantage of such natural calamities in order to avoid repayment, thereby increasing the magnitude of default.