Banks continue to experience serious losses in loan reservations and writeoffs resulting in significant adverse impact on profit performance. Many of these losses are unjustified and could have been avoided if lending officers had identified danger signals and took prompt action to rectify problems. Among the danger signals for ill-considered loans are: unavailability of internal information, such as financial statements and projections; unreasonable assumptions for financial forecasts; imaginative or creative accounting practice; declining equity base; unfunded cash requirements; inadequate management succession, considering age and health of existing owners / management and abilities of potential successor(s); arrogance as opposed to borrower co-operation; evasive answers to direct questions concerning recent or projected performance; legal action pending against the owners or the company.
In the beginning of the 1980s the banks were holding abundant funds due to the oil price rises of the early 1970s, followed by slump in economic activities (that caused the fall of the export earnings of developing countries) and high interest rates of early 1980s. Banks started enthusiastically to give loans to developing countries which later created the debt crisis in these countries.