What Causes Problem Loans?
Problem loans are those that have been delinquent (meaning the payments have gone unpaid) for more than 90 to 180 days. The 90 day cut-off is the general guideline for commercial loans, while consumer loans are generally a bit more lenient, with a 180 day window.
There are many reasons why a borrower might default on a loan payment, including job loss, economic hardship, or injury. Economic conditions, like a pandemic, can also impact a borrowers' ability to repay a loan.
Banks try to reduce the number of problem loans they have because they want a low ratio of problem loans. If they have a higher ratio, it might indicate that the bank is not lending responsibly to borrowers.
Problem loans often arise when a bank hasn't had these roundest lending policies. For example, if a bank accepts real estate as collateral when the borrower has little equity or if the collateral has questionable liquidation value, that's a red flag. Similarly some banks approve borrowers with bad credit and questionable character, indicating that there's a higher likelihood of default.