How can banks reduce loan defaults?
Before providing any loan, banks should carry out a profile assessment of the prospective customer. Lenders should study the person's credit report, check references from present and former banks, and determine how a borrower handles stress.
Recently, there was a poll conducted by Rupeetimes on how banks can reduce loan defaults. The poll judged the opinion of people on the following four measures:
a) Before approving the loan documents should be properly verified.
b) Sanction loan to only those who are working in government sectors.
c) During recession cut down the interest rates.
d) Banks should offer loan only to their account holders
The poll results show that maximum (64%) believe that to avert loan defaults, the foremost thing that banks should do is verify the documents like income proof , address proof etc properly.
A sizeable number (20%) are of the opinion that banks should grant loans to only those who have their accounts with them probably because in that case banks would already have an idea about the repaying capacity of their customers.
Some also said that loan defaults could be reduced if banks cut down the interest rates during slowdown. If the banks reduce interest rates during slowdown, people would be able to service their loans in a better way thus reducing the probability of defaulting on loans.