Why do loans go bad

List of Partners vendors. Debt that cannot be recovered or collected from a debtor is bad debt. Under the provision or allowance method of accounting, businesses credit the "Accounts Receivable" category on the balance sheet by the amount of the uncollected debt. A debit entry for the same amount is entered into the "Allowance for Doubtful Accounts" column to balance the balance sheet.

This process is called writing off bad debt. Under the direct write-off method, bad debts are expensed. The company credits the accounts receivable account on the balance sheet and debits the bad debt expense account on the income statement. Under this form of accounting, there is no "Allowance for Doubtful Accounts" section on the balance sheet. Banks prefer to never have to write off bad debt since their loan portfolios are their primary assets and source of future revenue.

However, toxic loans—loans that cannot be collected or are unreasonably difficult to collect—reflect very poorly on a bank's financial statements and can divert resources from more productive activity. Banks use write-offs , which are sometimes called "charge-offs," to remove loans from their balance sheets and reduce their overall tax liability.

Banks never assume they will collect all of the loans they make. This is why generally accepted accounting principles GAAP require lending institutions to hold a reserve against expected future bad loans. This is otherwise known as the allowance for bad debts.

If it turns out more borrowers default than expected, the bank writes off the receivables and takes the additional expense. When debts are written off, they are removed as assets from the balance sheet because the company does not expect to recover payment.

In contrast, when a bad debt is written down, some of the bad debt value remains as an asset because the company expects to recover it.

As of March , it accounted for Loans to industry formed By March , this figure had fallen to Click here to enlarge graphic. On an absolute basis, housing loans have driven the bulk of the growth. Even in , said to be a bad year for real estate, housing loans given by banks grew One explanation is that non-banking finance companies NBFCs , which also give out home loans, had a bad year; so bank housing loans kept growing.

Housing finance firms are NBFCs. Personal loans and credit card outstanding have grown too, albeit on a lower base. These are unsecured loans, with the borrower having offered no collateral against them. As of September , the bad loans rate of retail loans was 1. Mallya got off by transferring 6 cr. Everyone in the deal knew how to add, subtract and multiply. So the deal only adds up if both parties profited from the over-pricing of Kingfisher shares.

The real bosses of public sector banks are those who run the finance ministry. They are supposed to represent us, the ultimate share-holders. They are the ones who can pressure bank directors to make sub-optimal loans, and then to roll them over. They come and go with elections, and have no long-term interest in the health of the banks.

When NPAs mushroom, they order recapitalisation, meaning that our taxes get used to compensate for Modi and Mallya frauds, and make sure the balance sheets have enough capital for the next round of bad loans. When things go really bad, they point fingers at the previous government. But the patronage machine rolls on. And it is because of this love of patronage that there is no hurry to privatise public sector banks.

The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS. Home Banking Loans Go Bad. Borrowers may also default on personal loans, auto loans, mortgages and other types of debt obligations. Depending on the creditor and loan type, your account could go into default after a single missed payment. Or your account could be considered delinquent only after you miss several payments in a row. The consequences of defaulting also depend on the lender and type of loan.

Going into default may also result in your wages or tax refund being garnished if the creditor seeks a judgment against you. There are also unique circumstances associated with certain types of loans. For example, if you have a federal student loan in default, you may not be eligible for additional federal student loans, federal loan options like deferment and forbearance , or alternative repayment plans. However, unlike some other types of debt, you may be able to rehabilitate your federal student loan, get it out of default and get back on a repayment plan.

Auto loans are generally secured loans, which means that there is collateral your vehicle associated with the loan.