When a bank or other financial institution has declared a loan as a problem, it actually is then subset to an entirely new set of rules that must be adhered to. These loans are called “problem loans” and sometimes called a pass loan. Here are some terms that people who are dealing with problem loans need to be familiar with.
Special Mention- These types of assets are not in and of themselves labeled as deserving of an adverse classification but they are deemed serious enough that management should pay close attention to them. If the potential negative effects go unresolved, they can quickly deteriorate into a “problem loan.” This is why they warrant special attention.
Substandard- This is a type of asset which has been regarded as being insufficiently protected from loss. The obligor may not be in well enough financial worth that the repayment of the loan is guaranteed. If actions are not taken to correct this problem, there are very good reasons to suspect that the loan will not be repaid as promised.
Doubtful Assets- These types of assets have everything that a substandard asset has but it also has the added negative effect of being highly questionable as to id collection of the loan, whether in full or even in part, will be realistic. Hence the “doubtful” classification.
Loss Asset- This is a type of asset which is considered uncollectible. There is no real reason to think this loan will ever be paid off, either in full or a portion of it. The bank or other financial institution is better off writing off this asset instead of keeping it on the books, even if this means that future collection of the loan may be affected by the write-off.
These are all of the major terms involved when talking about “problem loans” or “pass loans.” Hopefully, this article has provided you with a great amount of information to learn more about the subject.