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Banks should establish a system to identify problem loans ahead of time for taking appropriate remedial measures. Such a system should provide appropriate guidance to concerned staff on identifying and managing various types of problem loans including corporate, commercial and consumer loans. Once a loan is identified as a problem loan, it should be managed under a dedicated remedial process. In this regard, banks may take into account the following factors:
a.
The credit policy should clearly set out how the bank will manage problem credits. The basic elements of managing problem credits may include, inter alia, negotiations and follow-up with the borrowers, working out remedial strategies e.g. restructuring of loan facility, enhancement in credit limits, reduction in commission rates, etc., review of collateral/security documents, and more frequent review and monitoring. Banks should provide detailed guidance in this regard in their systems and procedures for dealing with problem credits;
b.
The organizational structure and methods for dealing with problem credits may vary from bank to bank. Generally the responsibility for such credits may be assigned to the originating business function, a specialized workout section, or a combination of the two, depending upon the size and nature of the credit and the reason for its problems. When a bank has significant credit-related problems, it is important to segregate the workout function from the credit origination function;
c.
There should be an appropriate system for identification and reporting of problem credits along with the details of remedial measures on regular basis to the senior management and/or the Board of Directors or its relevant sub-committee;
