Non-Performing Loan (NPL)

A non-performing loan (NPL) is a loan in which the borrower has defaulted or has not made scheduled payments of interest or principal for a certain period, typically 90 days or more. NPLs are considered bad debts for financial institutions, as they represent loans that are unlikely to be fully repaid. Banks must either try to recover the debt or write it off, which can negatively impact their profitability.

Example

A bank classifies a mortgage as an NPL after the borrower fails to make payments for six months, signaling that the loan is unlikely to be repaid in full.

Key points

• A loan where the borrower has defaulted or hasn’t made payments for a specified period, typically 90 days or more.

• Considered bad debts that may negatively impact a bank’s financial performance.

• Banks must try to recover or write off NPLs.

Quick Answers to Curious Questions

What strategies can banks use to manage non-performing loans?

Banks can use restructuring, loan modification, selling NPLs to third parties, or initiating legal actions to recover as much of the debt as possible while minimizing losses.

How do non-performing loans impact a bank’s financial health?

High levels of NPLs can reduce a bank’s profitability, increase provisions for bad debts, and potentially lower its capital adequacy, affecting overall financial stability.

What regulatory measures are in place to address high NPL ratios?

Regulatory measures include requiring banks to maintain higher capital reserves, implementing stricter lending standards, and monitoring asset quality to ensure banks can absorb losses from NPLs.