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Problem Loans and Bad Debts (Insolvency (Causes of individual insolvency…
Problem Loans and Bad Debts
Problem Loan
Individual borrowers
Borrower's financial condition deteriorated
Unable to repay monies owed
Corporate Borrowers
Business no longer viable
Borrower's financial condition deteriorated
Borrower is unable to repay monies due
Insolvency
Causes of individual insolvency
Accident/Death of sole income earner
Loss of income
Over-commitment/Overspending (high gearing)
Causes of corporate insolvency
Technical/Commercial problems
Political changes
: Eg, tariffs, employment law, intellectual property law etc
Economic changes
: A shift in the structure of an economic system
Technical Changes
: Improvements in design/quality of new capital goods/intermediate inputs
Financial Problems
Uncontrolled capital expenditure
Problem collecting debts (weak credit control)
Diversification/Expansion without sufficient capital
Tight cash positions (Irregular payments to creditor)
High gearing/too much debt
Over-trading (insufficient liquid capital)
Management Weakness
Management do not have skills to run/sustain growth/rapid changes in business (over-expansion)
Management unable to motivate staff resulting in high turnover of key personnel
Management in hands of single executive
Management unwilling to inject capital due to lack of confidence/commitment
No proper succession planning: Family business handed down irrespective of management skills and interest
Definition
A term when an individual/org can no longer meet its financial obligations with its lender(s) as debts become due
How problems can be detected
Through visits/interview (for corporate borrower)
Insufficient operations
High staff turnover
Poor management structure
Other signs
Management problem (conflict)
Through audited financial accounts
Unsatisfactory management accounts
Creative Accounting (Capitalising costs to defer expenses, recognising income early)
Weak financials
Through internal records
Post-dated cheques issued and returned
Dormant accounts
Frequent stop-payment on cheque
Arrears in loan repayments
Frequent excesses/top-ups
Remedial Actions
2 Immediate priorities :
Restore business to original position of profitability
Reshape company's balance sheet and improve cash flow
By borrower
Business Review
Assess viability of business to
Is business still viable
Can loan still be salvaged
Determine the seriousness of situation
Take appropriate remedial actions
Action plans
Identify area for closer attention
Monitor progress
Isolate causes of problem
If beyond salvation, suggest litigation
Review financial position
Review Security and Security Documentation
Whether there's any prior plans
Assess actions of other creditors
Whether security is enforceable
Availability of additional security
Personal situation: financial status of guarantors