From a lender’s perspective, loan collateral is a key issue provided under a loan agreement. The bank must have coverage for the funds granted, and this means that the borrower with his assets guarantees that the commitment will be repaid, even if he stops paying installments due to financial difficulties.
Credit insurance – is it worth it?
If the bank immediately states that there is a shortage of collateral (the liquidity value of the collateral is lower than the amount of debt), then one should seriously consider the prospects of the borrower’s long-term viability and answer the question whether the company has sufficient potential and the ability to create income necessary to service the debt.
In the conditions of deteriorating financial condition of the enterprise, regardless of the existence of a surplus or insufficient collateral, the bank should consider the possibility of demanding repayment of the loan and liquidating the collateral rather than engage in the borrower’s lack of prospects.
Bankers are sometimes criticized
For limiting themselves to the simplest form of restructuring a difficult loan, which amounts to preparing an annex to the loan agreement, setting only new, longer repayment terms. Doing so often means simply refusing to recognize the problem or, worse, unwillingness to make an effort to overcome it.
On the other hand, however, such an annex can be an absolutely justified move. It will allow the bank and the borrower to assess both the loan and possibly alternatives to long-term restructuring, and will also allow the bank to correct the shortcomings of the collateral.
It happens that even the most thorough and comprehensive analysis of the problem does not bring satisfactory conclusions. In such a case, the creditor might consider the option of demanding immediate repayment of the loan and liquidation of the collateral, and if the entire amount is not covered in this way, the bank would write off the rest of the debt.
It happens that an analysis of the nature of the problem
Determining the possibilities of company recovery, along with the required time and resources, as well as examining the desirability, expected effectiveness and costs of any further options, such as arrangement or bankruptcy proceedings, rather indicate the lack of real prospects for complete satisfaction of bank claims.
In such a situation, it makes a lot of sense to have an energetic action, a significant reduction of debt, quick collection of amounts that have not been written off, to forget about a difficult loan and an outstanding client even faster.
We have repeatedly emphasized the great importance of collecting and analyzing information about the borrower and his interests, as well as a comprehensive examination of the problem. Thanks to this, the credit officer will understand the history of customer relations, the reasons for his problems and the place of the bank in the overall picture of the borrower’s debt. Visit the banking portal to choose the best offer.