Financial crises can hit an entire country, region or businesses or banks. Once this occurs, it may become necessary to go through a review process of assets and debts. Typically, the purpose is to determine what needs to go so the business can either become solvent again or shutter its doors. Banks are particularly interest in determining how to best handle outstanding loans During the process, bank regulators may identify a special mention loan that is not adversely classified, but nonetheless requires immediate attention. If left alone, these types of loans can soon be switched to the adverse column.Why Loans Receive This Classification Loans grouped as special mention accounts have outstanding balances that are anywhere from 30 to 90 days past due. Typically, the lender has failed to properly supervise the loan, including maintaining adequate documentation. In some cases, the lender might have simply deviated from prudent lending practices that might have prevented these loans from getting to this status in the first place.Such loan assets reflect weakness in areas of administration, servicing and/or collection of borrowed money. This is different from credit weaknesses that refer to adversely classified assets.Credit Risks The primary financial risk facing the banking system today is credit. Practically every income-producing activity involves some level of credit risk. What is critically important for a bank is how well – or poorly – it manages the performance of credit risk over a period of time.Institutions will ultimately fail when capital depletes because of losses caused by poorly approved loans where customers default. Therefore, the first step is to identify and rate the risk to approving credit very closely.With a well-managed credit rating system, banks promote soundness by making informed decisions. Bank management is also able to monitor any changes that may cause previously safe loans that begin to trend toward possible risks.Getting Out of This Category A solid strategy to reverse the status of these loans should be a priority. Management must take expert recommendations and apply what is most useful to turn the loans around as soon as possible. Flawed administrative practices may require an update in processes to accomplish this.Now that many banks are implementing robust risk rating systems internally, the effectiveness of measuring credit risks is improving. Continued action in this direction will help to ensure that banks improve processes and have better risk management practices as part of their portfolio.
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