What is Default Culture in Banking

Default essentially means a debtor has not paid a debt which he or she is required to have paid.

In banking terms, default means failure to meet a contractual obligation, such as repayment of a loan by a borrower or payment of interest to bond holders.

Default gives the note holder, or the holder of a mortgage bond, rights and recourse under the mortgage indenture to institute foreclosure proceedings or to accelerate the maturity date.

Problem loans and loan losses essentially reflect the default risk inherent in a borrower’s willingness and ability to repay all obligations. Default culture is such a factor which is liable for creating problem loans. Here;

  1. The credit analysis may have been faulty because it was based on inadequate information or incomplete analytical procedures.
  2. Economic conditions may change adversely after the loan is granted so that the borrower cannot meet debt service requirements.
  3. A borrower may simply choose not to repay.

Events of default: Most loans contain a section listing events of default, specifying what actions or inactions by the borrower would represent a significant violation of the terms of the loan agreement and what actions the bank is legally authorized to take in order to secure the recovery of its funds.

The events of default section also clarify who is responsible for collection costs, courts costs and attorney’s fees that may arise from litigation of the loan agreement.

In conclusion, we can say that borrower’s moral character, accountability and maintenance of transparency can ensured to avoid default culture.