In an effort to fulfil their aspirations and desires, people tend to take loans to buy a house, car etc. But for some, repaying these loans often becomes an uphill task. Non-repayment of loans certainly results in consequences for borrowers, more so, it affects the banks’ profitability in an adverse way. While it becomes a borrower’s responsibility to avoid defaulting on the loan repayment instalments, it is primarily a bank’s responsibility to ensure no such actions are incurred as a result of bad intent, unwillingness or inability to pay etc.
The rise in Non-performing assets (NPA) accounts in banks is an alarming concern today. While the government and Reserve Bank of India (RBI) have been actively figuring out ways to control these numbers, there’s a lot that banks can do. As per the RBI guidelines, banks have been empowered to take certain measures to control NPA levels and take necessary action against them.
Let us look out at the ways banks adopt for NPA account settlement.
1. One Time Settlement (OTS)
Banks can analyse the financial conditions of the borrowing party and decide to give them an option of one-time settlement of loans. Here the already listed NPA accounts and defaulters are given a provision where they can repay the loan in bulk. The banks can waive off a certain amount (or interest) for the borrower, treating it as a loss. The facility is available only on a case-to-case basis.
2. Restructuring of loan
When the borrowers aren’t able to repay the instalments for more than 90 days at a stretch, banks may consider the option to restructure their loans. This means, in case the borrowers feel the burden of paying EMI amount every month (as a result of job/location change etc.), banks may consider extending the tenure of their loan which will eventually reduce the monthly instalment. Also, they may allow borrowers to pre-pay the loan amount at once if their financial condition improves anytime in future by waving off the penalty (in special cases).
3. Converting unsecured loans to secured
Unsecured loans carry larger risks for banks as in such cases, banks do not have an asset mortgaged by the borrower with the bank. Therefore, the banks have to follow stricter norms for them. Banks can ask the delinquent accounts to switch to secured loans and offer banks a security in the form of assets. By doing so, banks can cut down interest rates for borrowers and also reduce the amount of EMIs.
4. Deferring the payment
When the borrowers feel that they are subject to expenses in near future that will affect the payment of EMIs, then they may approach banks for help. In such cases, banks may consider postponing their instalments for a particular time till they are back in a financial state where they can repay the loan as agreed earlier. This certainly is possible at the discretion of banks where they can charge a penalty.