Vinu:  Manu, when a loan account turns NPA, is the problem usually repayment failure alone?

Manu: Not really. Non-payment is often the final outcome. The actual problems may have started months earlier—in the business, financials, management or even during appraisal.

Vinu: So can the seeds of an NPA be present right from sanction?

Manu: Yes. Weak appraisal can be the starting point. Overestimated sales, unrealistic projections, inadequate promoter contribution, excessive debt or incorrect assessment of working capital can make the loan vulnerable from day one.

Vinu: Can you give me a simple example?

Manu: Suppose a company projects annual sales of ₹50 crore and gets limits based on that expectation. Actual sales reach only ₹28 crore. If fixed costs and debt obligations were structured assuming ₹50 crore turnover, repayment pressure can quickly develop.

Vinu: What commonly goes wrong after disbursement?

Manu: A major issue is diversion of funds. Working capital meant for inventory and receivables may be used for buying fixed assets, investing in another business or funding group companies.

Vinu: Why is diversion of working capital so dangerous?

Manu: Because the business then loses liquidity. Suppliers remain unpaid, stock purchases slow down, operations suffer and bank limits remain continuously utilised.

Vinu: What about delayed receivables?

Manu: That is another common reason. If customers who normally pay within 60 days start taking 120–180 days, the borrower’s cash gets locked in debtors. Sales may look healthy, but cash flow becomes weak.

Vinu: Can inventory also create problems?

Manu: Certainly. Slow-moving or obsolete inventory locks up funds. Sometimes the stock reported to the bank may also be substantially higher than the stock actually available.

Vinu: Are all NPAs caused by financial mismanagement?

Manu: No. Genuine business problems also cause stress—loss of a major customer, raw-material price increases, regulatory changes, project delays, economic slowdown, technology changes or unexpected disruptions.

Vinu: How important is promoter behaviour?

Manu: Extremely important. Delayed infusion of promised funds, frequent related-party transactions, unexplained withdrawals, non-cooperation with the bank or lack of transparency can significantly increase credit risk.

Vinu: What early signs should a banker watch?

Manu: Some important warning signals are:

Vinu: Does inadequate monitoring by the bank also contribute?

Manu: Yes. Sanction is only the beginning. Delayed inspections, weak review of financial statements, failure to track end-use of funds and ignoring early warning signals can allow a manageable problem to become serious.

Vinu: What about relying heavily on collateral?

Manu: That can be a costly mistake. A loan should primarily be repaid from business cash flows, not from selling collateral. Strong security cannot compensate for an fundamentally unviable business.

Vinu: When does a stressed account finally become NPA?

Manu: For a typical term loan, if interest or principal remains overdue for more than 90 days, it can be classified as NPA, subject to the applicable RBI income-recognition and asset-classification rules. Similar prescribed criteria apply to cash-credit and overdraft accounts.

Vinu: What is the biggest lesson from failed loan accounts?

Manu: Don’t wait for the account to become NPA before recognising the problem. Most failures leave signals beforehand.

Vinu: So what should a banker learn from every NPA?

Manu: Look backwards and ask four questions:

To learn more about Banking & Financial related topics

We invite you to join our Diamond Membership
Check - https://courses.carajaclasses.com/courses/Diamond-Membership-6305fad1e4b0cccc82d610be
For Special Discount on Diamond Membership 
Connect with us  - https://wa.me/919025100249?text=DLM