Loans are a complicated business, and they are a headache to many people. With a seemingly endless amount of paperwork and legal talks, it is no wonder that many people are confused and intimidated by them. Thankfully, while they are complicated, many aspects of them can be simplified and made easier to understand. So if you have criticized loans and need someone to help you understand them, then here is a little information to get you started:
There are four different categories of criticized assets as classified by your bank loan. One of them is a doubtful loan, in which repayment is questionable and perhaps even improbable. The debtor might not have a reliable way to repay, or might not be worth much, and the loan itself might not have any collateral to support it.
While not necessarily meaning the loan has no salvage value or recovery potential, a loss classified loan is one that has been officially considered uncollectable. At that point, it has as little value as a bankable asset. Many banks have loan loss provisions to safeguard themselves from these loans, but obviously having your loan classified as a loss by the bank is not something you want to achieve.
Similar to a doubtful loan, substandard loans are insufficiently supported by the debtor’s funds and worth. While the bank does not exactly say that the debtor won’t be able to completely repay the loan, they do assume they are going to take some sort of loss.
The last category that banks use, and the one that might surprise you the most, is the special mention category. When a loan is given a special mention, it’s been determined to have some form of weakness that demands management’s close attention. Perhaps the strangest category, it is possible that it gets used incorrectly quite often, and it, in fact, might be more a reflection of the bank instead of the debtor.