What Is Non Performing Loan


What Is a Nonperforming Loan (NPL)?

A loan that is in default because the borrower hasn’t made the agreed-upon payments for a predetermined amount of time is known as a nonperforming loan (NPL). While the precise components of nonperforming status may differ based on the terms of each individual loan, “no payment” is typically understood to mean making no payments for principal or interest.

Additionally, the duration varies based on the loan type and industry. Generally, however, the period is 90 days or 180 days.

  • A loan in which the borrower is in default and hasn’t made any scheduled principal or interest payments for a predetermined amount of time is known as a nonperforming loan (NPL).
  • If a commercial loan is 90 days past due, the lender considers it nonperforming.
  • If there is a lot of uncertainty about future payments, the International Monetary Fund classifies loans that are less than 90 days past due as nonperforming.
  • However, there is no standard or definition of NPLs.
  • To raise capital and/or concentrate on making profitable loans, some banks choose to sell their non-performing loans (NPLs) to investors or other banks.

what is non performing loan

How a Nonperforming Loan (NPL) Works

When a loan is nonperforming (NPL), it is said to be in default or almost in default. There is much less chance that a debtor will repay a loan in full once it becomes nonperforming. Even if the debtor hasn’t made up all of the missed payments, an NPL becomes a reperforming loan (RPL) if the debtor starts making payments on it again.

When a commercial loan is 90 days past due or the debtor has not made any interest or principal payments in that time, the loan is deemed nonperforming in the banking industry. A consumer loan becomes an NPL when it is 180 days past due.

If principal or interest payments are not made on time or at all, a loan is in arrears. When a debtor is unable to fulfill their obligations and the lender believes that the terms of the loan have been violated, the loan is said to be in default.

Types of Nonperforming Loans (NPLs)

A debt can achieve nonperforming loan status in several ways. Examples of NPLs include:

  • A loan for which an agreement or modification to the original agreement has resulted in the capitalization, refinancing, or delay of ninety days’ worth of interest
  • a loan for which the lender no longer has faith that the debtor will make future payments even though the payments are less than 90 days overdue
  • a loan where the principal repayment maturity date has passed but a portion of the loan balance is still due

Certain abusive or deceptive practices used to collect unpaid personal loans are prohibited by the Fair Debt Collection Practices Act. But this law does not apply to the original lender; rather, it only covers third-party debt investors or collectors.

Official Definitions of Nonperforming Loans (NPLs)

Certain guidelines are provided by a number of international financial authorities for identifying nonperforming loans.

The European Central Bank Definition

Comparability of definition and assets is necessary for the European Central Bank (ECB) to assess risk exposures amongst central banks in the euro area. When conducting stress tests on participating banks, the ECB outlines various factors that may result in the classification of non-performing loans (NPLs). After conducting a thorough analysis, the ECB created standards to classify loans as nonperforming if they meet the following requirements:

  • 90 days past due, regardless of whether they are delinquent or impaired
  • Impaired with respect to the accounting specifics for U. S. GAAP and International Financial Reporting Standards (IFRS) banks.
  • In default according to the Capital Requirements Regulation

Lenders must set aside money to cover nonperforming loans for a period of two to seven years, depending on whether the loan was secured or not, according to an addendum that was released in 2018. Lenders in the eurozone still had about $1 trillion in nonperforming loans on their books as of 2020.

The International Monetary Fund Definition

Additionally, the International Monetary Fund (IMF) establishes a number of standards for nonperforming government loans.

The IMF has defined nonperforming loans as those whose:

  • Debtors have not made principal or interest payments in at least ninety days.
  • By agreement, interest payments totaling 90 days or more have been capitalized, refinanced, or postponed.
  • Less than 90 days have passed since payments were due, but there is still a high degree of uncertainty or no guarantee that the debtor will pay in the future.

Nonperforming loans have the potential to lower a borrower’s credit score, which would make future borrowing more difficult and costly.

Nonperforming Loan (NPL) vs. Reperforming Loan (RPL)

Nonperforming loans are those in default. Loans that were nonperforming at one point but are now performing are referred to as performing loans. The reperforming loans are now making payments after being past due for a minimum of 90 days.

Reperforming loans are frequently those on which the borrower has declared bankruptcy and, as a result of the bankruptcy agreement, has kept up monthly payments. Through a loan modification program, such an agreement typically enables the borrower to become current on their debt.

Example of a Nonperforming Loan (NPL)

Consider a fictitious borrower who loses their job and is unable to repay their loan. The bank or lender will consider the loan nonperforming after 90 days without payment. The bank would add the loan to its nonperforming list and keep pursuing repayment of the outstanding balance.

There are multiple avenues available to the creditor. Sending the debt to a collections agency, which gets paid a portion of whatever money they recover, is one of the most popular ways to collect the debt. A debt buyer may purchase the debt from the lender for a small portion of its face value. This is frequently a more prudent financial move than attempting to collect on a nonperforming loan, even though the creditor will lose money.

It may be possible for borrowers with nonperforming loans to work out a partial debt forgiveness with their creditors. But this might lower their credit score, which would make future borrowing more difficult and costly.

What Happens to Nonperforming Loans?

Banks may sell nonperforming loans to investors or other banks. If the borrower resumes making payments, the loan could potentially turn into a performing asset. In other situations, the borrower’s collateral may be repossessed by the lender to cover the outstanding balance.

What Are the Causes of Nonperforming Loans?

When delinquencies are high and there are economic hardships, nonperforming loans typically arise. They take place when a borrower misses payments for an extended length of time (90 to 180 days).

Why Do Banks Sell Nonperforming Loans?

Selling nonperforming loans could allow banks to concentrate on the loans that generate revenue each month. It might be more profitable to sell the loans at a discount rather than attempting to collect money from a delinquent borrower.

Who Buys Nonperforming Loans?

Real estate investors as well as other banks or distressed debt investors might think about making investments in nonperforming loans.

How Do You Solve a Nonperforming Loan?

Regaining payment schedule compliance is a necessary step in repaying a nonperforming debt. This can be accomplished by obtaining a loan modification agreement from the lender.

The Bottom Line

When there is economic uncertainty, the amount of nonperforming loans typically increases. These are the loans for which the borrowers are unable or unwilling to make payments. If no payment is received for a predetermined amount of time (typically 90 or 180 days—depending on the lender), the loan becomes non-performing (NPL). Article Sources: Investopedia mandates that authors cite original sources to bolster their claims. These consist of government data, original reporting, white papers, and conversations with professionals in the field. When appropriate, we also cite original research from other respectable publishers. You can read more about the guidelines we adhere to when creating impartial, truthful content in our


What is an example of a non-performing loan?

NPL examples include: Loans where an agreement or modification to the original agreement has caused interest to be capitalized, refinanced, or delayed for a period of ninety days A loan for which the lender no longer has faith that the debtor will make future payments even though the payments are less than 90 days overdue

Is a non-performing loan the same as a bad debt?

A bank loan is deemed non-performing if the debtor is unable to make payments. The borrower does not honor the agreed-up installments or interest. Take a non-performing loan as “bad debt. It’s among the credit management tasks that takes the most time. The risk of nonpayment is unacceptable.

How do you identify non-performing loans?

When a borrower shows signs of not being able to repay a loan or if more than 90 days go by without the borrower making the agreed-upon installment payments, the loan is considered non-performing.

What is a loan that is not performing?

When a borrower defaults on a loan and fails to make monthly principal and interest payments for a predetermined amount of time, the loan becomes a non-performing loan (NPL).

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