Non-performing Loan (NPL)

NPL or a non-performing loan is a bank loan, which will not be repaid by the borrower in full or is subject to late repayment. The Non-performing loans meaning presupposes that the borrower is in default and does not pay the monthly interest or principal repayments for a specified period.

The terms of a non-performing status can vary, however, “no payment” is usually defined as zero payment of either interest or principal. The specified period of the non-performing loans also varies, depending on the type of loan. Usually, the period ranges from 90 to 180 days.

In the banking sector, a commercial loan is considered as non-performing if the borrower is 90 days past due. A non-performing loan is considered in default, but if the debtor resumes payment again, the loan becomes reperforming.

Types of non-performing loans

A debt can get a status of a “non-performing loan” in several ways. There are three major types of NPLs, including:

• A loan under which 90 days’ worth of interest was capitalised, delayed or refinanced due to an agreement or according to an amendment to the original agreement.

• A loan, in which payments are late for less than 90 days, but the lender does not believe that the borrower will manage to make further payments.

• A loan, in which the maturity date for the repayment of principal has already occurred, but a portion of the loan still remains outstanding.

Non-performing loan ratio

Banks are required by law to reveal their ratio of non-performing loans to the amount of total loans. An NPL ratio is used to measure the level of the bank’s credit risk and quality of outstanding loans. A high ratio means the bank bears a greater risk of loss if it fails to recover the owed amounts, while a low ratio means that the outstanding loans pose a low risk to the bank.

Non-performing loans (NPLs) cut banks earnings and can become the reason for huge losses, which impact the bank’s sound performance. High levels of non-performing loans hamper banks from lending to businesses and households. Eventually, it could be harmful to the economy.

To offset the credit risk, the bank evaluates the expected loss from the non-performing loan and books a corresponding provision. The portion of the non-performing loan, covered by the provision is referred to as the bank’s NPL coverage.