(1)Business Loans: turn out to be bad due to various factors, such character and capacity of the borrowers not being good enough resulting in diversion/ bad utilizations of Funds or the loans, the condition of business turning

adverse business conditions turning adverse, original projections/plans/assumptions being off the mark, the value of security having deteriorated.

(2)Character a borrower may: ab initio, have no genuine and sincere intention to use the lenders funds to conduct diligently the business (for which the Loa/facility has been availed of and adjust the overdraft/cash credit/loan out of recycled funds and/or out of profits generated by the business credit business loan. Such borrower will start diverting borrowed funds for personal or family expenditure or for a business/activity other than the one for which the relevant loan/facility has been drawn. The reason for credit having gone bad is; obviously, due to credit appraisal having been based on inadequate or misleading information.

In some cases, the borrower may have initially genuine and honest intent to carry on the bad credit business loan diligently, but when things start going like of projections/plans/assumptions in respect of the business having proved to be unrealistic or unreasonable) the borrower tries to by diverting funds to the extent possible until the lender becomes aware following repeated defaults of the borrower. A high Credit Rating may only partially reflect the intention of the party to make repayment as per stipulations laid down by the lender.

(3) Capacity: Not Seldom the borrower may be lacking the required resourcefulness, technical competence, human relations and leadership skills, financial acumen, marketing talents etc. required for successful conduct of the business even if he has the genuine desire to conduct the business. The borrower may have some of these skills/talents but lack others and if they are critical at the relevant time they may cause the business to suffer or even fail altogether. The borrower usually does not realize this and attributes the business failure to other factors like market conditions or, even, inadequacy of the quantum or the terms of the loan/facility.

(4)Business Conditions turning adverse: In the current dynamic environment, changes are taking place in technology, competition, packaging, marketing terms, tastes of buyers, regulatory framework applicable to the business, financing conditions etc. which go to affect the functioning of a business. One typical example of each of these categories of changes is set out below.

Some of the new technologies are: CD s in place of diskettes, DVD players in place of Video Cassette players, digital cameras in place of film-based cameras. These changes cause businesses based on old technology to lack the demand which is the essential minimum for survival of a business.

In the early stages of a business there may be very little competition; but, if the capital, skills, space etc. required for a business can easily be acquired many competitors will come into being soon enough. Then, the demand available for the business financed by a lender will prove inadequate to leave it viable. A new internet kiosk or a grocery store opened in a newly developed colony is such an example. When several other such kiosks/stores emerge within a year after a business financed by a lender is set up, the business financed by the lender will cease to be viable unless the colony has s grown well enough to give rise to enlarged demand which can be shared by all the competitors. But competition may also become unbearable if some the competitors adopt more aggressive tactics like making their place of business or quality of service more attractive. Similar is the position with regard to packaging.

The terms of supply of goods or services like allowing credit in supply, home delivery of grocery items, acceptance of credit cards, greater range of products on sale also make difference in the demand of a business unit.

The types of books, clothes, music etc. on sale by a business financed by a lender may not represent current tastes and, consequently, the financed business, if engaged in sale of goods and services not in current taste may become unviable.

After a business is financed, the laws, rules and regulations applicable to a business may undergo change making the business unviable. For example, increase in sales tax, ban of sale of liquor where the financed business involves sale of liquor in a particular locality, are a few examples.

The increase in interest rate, the increase in the volume of credit required for a business because of rise in input or infrastructure costs, the lenders calling for a raise in the collateral required beyond a level that the borrower can furnish are some examples of change in the financing conditions that may affect the viability of a business.

(5) Original projections/plans/assumptions being off the mark: Estimates/expectations of input prices (e.g. rent, availability of electricity and charges payable for the same, and cost of stocks to be purchased) as well as the sale prices of goods/services may prove to be unrealistic making the business unviable. The quantum of demand or availability of inputs required as assumed at the time of financing may prove to have been over-optimistic.

(6)Deterioration in the value of security: In most cases the main security is the stock and receivables of the business. Some of the stocks of inputs outputs may have remained unused in the manufacture or sale. The current market values of these stocks may have declined. Similarly, some of the receivables may have become bad debts and unrealizable.


The quantum of stocks and the aggregate value of receivables may have been shown at inflated levels by the borrower in his statements as submitted to the lender. Similarly, if the finance was extended for acquisition of machinery or equipment the current market value of the same may be much less than shown in the company books because of obsolescence of these items as held by the business or because of decline in their market prices. Even the current market value of land may be less than appearing in the companys books, particularly where the value of development on the land as recorded in the borrowers books was inflated.

A business may become sick because of various factors enumerated above, but also because the borrower the borrower has been unable to properly address and remedy the relevant factors.