Five Steps To Resolving Problem Loans

With household debt rising and concerns about the economy growing in some quarters, identifying and addressing problem loans early can be critical. In Q4 2024, total household debt climbed to $18 trillion, with credit card balances hitting a record $1.21 trillion and auto loan delinquencies remaining elevated, according to the Federal Reserve Bank of New York.  As retired bank executive and RMA course instructor Joseph May has outlined in The RMA Journal, a structured approach can help banks support struggling borrowers while protecting their own interests. Here’s a breakdown of the five key stages: 

• Recognize the Warning Signs – Borrowers may be reluctant to admit financial trouble, so lenders must proactively monitor performance. Concerning signs include delayed financial reporting, lack of a business plan, or delinquent trade payments. A past-due loan isn’t always the first indicator of distress—many defaults happen before missed payments due to covenant breaches. A pre-workout agreement can set expectations and structure communication. 

• Identify the Root Cause – Borrowers often focus on symptoms, like cash shortages, rather than the underlying issues. Lenders can help by guiding them to industry benchmarks—such as RMA’s Statement Studies or trade association data—to assess internal and external factors affecting performance. 

• Assess Available Resources – A borrower’s financial and operational resources must align with their recovery needs. If management is struggling to make necessary changes, a turnaround professional can provide guidance. While hiring an expert may not be cheap, borrowers who do so tend to recover faster. 

• Develop a SMART Turnaround Plan – A well-structured plan should include Specific financial and operational goals, Measurable progress, defined Actions, Reasonable expectations, and a focus on Timely near-term improvements. The bank should enter into a formal workout agreement to monitor compliance and ensure necessary legal protections. 

• Implement and Monitor – Execution requires strict oversight. Lenders should enforce compliance while staying flexible enough to adjust strategies if needed. Early defaults can be addressed through plan revisions. Consistent enforcement helps manage risk and strengthens borrower-lender relationships. 

A structured approach to problem loan resolution can turn distressed borrowers into long-term success stories—benefiting both the bank and its customers.