Bad debt is a familiar concept in the financial and banking industry. Bad debt reduces the financial reputation of individual investors and businesses. So what is bad debt and how does it affect borrowers? Let’s find out in detail what is bad debt in a bank and related issues in the article below.

What is bad debt?

Bad debt is unpaid or overdue debt that is unlikely to be recovered. It can negatively impact an organization’s financial health and credit rating and may lead to higher costs and increased risks. In order to avoid bad debt, it is important to carefully manage cash flow, understand the risks associated with certain types of credit, and have a detailed collection plan in place in the event of non-payment. Having strong internal controls, effective risk management practices, and a clear policy for writing off bad debt are all key to managing bad debt and avoiding the serious and lasting consequences associated with carrying too much bad debt.

 

3 Levels of bad bank bank

Bad loans, or outstanding loans that are past due or in default, are classified into five categories\

Group 1: Qualifying debt

Qualified debt includes 3 types as follows:

• Debts that are due and assessed to be able to fully recover both principal and interest on time.
• Debts that are overdue for less than 10 days are assessed to be able to recover both principal and interest of overdue debts and due debts on time.
• The debt is classified as a lower-risk debt.

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Group 2: Debts needing attention

Qualified debt includes 3 types as follows:

• Debts that are overdue up to 90 days (except for debts that are overdue for less than 10 days, are classified as qualified debts and higher-risk debt groups.
• Debts that have been adjusted for the first time and are still due (except for debts whose repayment terms have been rescheduled and debts classified as low-risk debts by credit institutions/foreign bank branches) than).
• Debts are classified as lower or higher risk.

Group 3: Subprime debt

Qualified debt includes 3 types as follows:

• Debts that are overdue from 91 to 180 days (except for those classified as higher-risk debts).
• Debts that have been extended for the first time are still due (except for debts that have been rescheduled for repayment and debts that are classified by credit institutions and foreign bank branches as lower-risk debts and loans with credit risk). higher risk.
• Debts that are exempted or reduced in interest due to the borrower’s inability to pay interest under the contract (except for debt in the group of higher risk debt).

Above is all information about what bad debt is, the criteria for bad debt classification, and the causes of bad debt. When bad debt arises, the borrower’s financial capacity will be underestimated, making it difficult to get a loan later. Therefore, investors should minimize the possibility of bad debt arising, if any, they must find a way to clear the debt in the fastest time, avoiding affecting investment plans in the future.