Why banks fail in recovery of loans?

The business of banking depends upon acceptance of deposits and lending the money received from the depositors for profitable business. Unless effective lending takes place, banks cannot earn profits. The net profit for the bank is the income received through interest on loans and other income less interest paid to the depositors and other administrative expenses. Despite the facts that banks are taking effective steps, many banks are found to be failing in their duties in recovery of loans and bad debts prompt the bankers to close down their businesses at the later stage.

1. Proper credit investigation: It is the responsibility of the banker to pay utmost importance while selecting a borrower. Any laxity on the part of the banker during the course of selection of the borrower will land him in trouble in future days. There is large number of ways through which the selection of the borrowers can be done in an effective manner. The banker should necessarily follow the various credit investigation tips available to them and this information can be provided to them by senior bankers.

2. Follow up: Once the loans are granted, it is the duty of the bankers to have regular check up in regard to prompt recovery of installments and interest. The cute bankers start communicating  the borrowers at least seven days in advance so that the borrowers are promptly reminded of their dues and once the borrower understands that the banker is cautious in this respect he never fails to remit the installments promptly and rarely he fails payment of his dues.

3.Overdue: Despite proper follow up by the bankers, some borrowers fail to remit their dues on account of many reasons namely; they might have lost their jobs thereby losing their salaries; on account of some unforeseen circumstances they may not be able to remit their dues; they are intentionally not willing to pay back their dues; they are least bothered about the outcome in case of their failure to remit the dues etc.
 4. Understanding the defaulter: Once the account becomes overdue and the banker finds that the borrower fails to remit the dues, he should immediately contact the borrower and take necessary steps to find out the exact reasons for not making the payment. In fact this step is very much essential and during the course of discussion with the borrower, the banker may be able to understand the reasons behind the borrower's failure to remit the amount. While in many cases the reasons are found to be genuine, in some cases, the borrowers are found to be intentionally stopped remitting their dues.
 5. Prompt action: When it comes to prompt action on the part of the bankers, they are; sending the reminders; contacting the parties over phone and in person; informing the defaulting borrowers about the consequences in not effecting payments in time; proceeding towards seizing of the securities etc.
 6. Code for recovery: A banker who finds time to follow each account and implements effective strategies at the right opportunity in recovering the dues is found to be successful always and he is instrumental in increasing the profit  for the bank