Causes and measures of problem loans in banking industry

Abstract

Commercial banks play a very important role in our economy .In fact it is difficult to imagine how our economic system could function efficiently without many of their core services. There is no doubt in this that they are the heart of our financial system. The nature of the banking specially the commercial banking, with its great reliance on public confidence and its influence on nations economic life, makes it mandatory that the management of the bank be of a high quality and efficient. By good management, banks are in position to attain maximum operating efficiency and profitability. The management of the banks assets must be conducted in a profitable and safe manner. Safety is essential to banking since banks hold billion of rupees of deposits individuals, business , and government. Profits are also necessary for the successful operations of the banks. And when we think of banks assets, loans are the foremost and the most important ones that come in our minds . So lending is the most profitable as well as most risky function performed by the banks . Therefore they must be done efficiently and with minimum of Joss. Off course banks can be never be without risk factor, however without prudent approach, care full analysis of borrower capacity, and character, following the laid down loan policy of the bank as well as of central Bank precautionary measures, the risk can be minimized. These are the factors, which can reverse the ever-mounting trend of non­ performing loans in banks in Pakistan. The changing global and financial environment, rapid rate of technology change, and intense level of competition has made banks in Pakistan, to upgrade themselves in all grades of the operations to survive and compete even with in the domestic market. It is this pressure, which has caused certain financial institution to be closed down and certain others to be merged with the profitable ones.