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Definition: Doubtful Loan
In banking parlance, a doubtful loan is one where there are questions over whether or not a full repayment would be made or not. The extent to which the repayment can be questioned can vary from an absolute loss of the principle to something lesser – and all of this to be averted only if corrective actions are taken.
These loans could also be instances of non-performing where interest is long overdue.
In order to hedge against this, there is an important process called credit rating which attributes the creditworthiness of individuals and firms. The banks or lenders usually command a higher interest the riskier a loan can get. If a borrower has high credit rating, there’s certainty of repayment and therefore, the interest rates set are often lower.