The term “non-performing loan” (NPL) is widely used in the banking and finance industry. Keep reading to find out what it means!
What Is An NPL?
An NPL is a loan that is in default because the borrower has not made the scheduled payments for a specific period, generally ranging from 90 to 180 days.
What You Need To Know About NPLs
The situations in which the NPL definition applies may differ based on the loan’s specific terms and the industry in question. Some examples of NPLs are:
- A loan where the interest that has accrued over a 90-day period has been capitalized, refinanced, or postponed due to an agreement or amendment to the original terms.
- A loan where the payments are less than 90 days overdue, but the lender is uncertain about the borrower’s ability to make future transfers, potentially due to changes in their financial situation.
- A loan where the maturity date for the principal repayment has passed, but a fraction of the loan amount remains unpaid, possibly due to a lack of financial means.
Once a loan becomes non-performing, the likelihood of the borrower repaying it in full decreases. However, if they were to resume covering the NPL, it would become a re-performing loan (RPL), even if they have not caught up on all the missed payments.
A bank can repossess the collateral put up by the borrower to satisfy the outstanding loan balance. Alternatively, they can sell an NPL to investors or other banks.
Banks typically sell NPLs at a discount to their face value, depending on factors such as the loan’s age, the collateral securing it, and the borrower’s creditworthiness. Once an investor purchases an NPL, they can either try to collect the debt themselves or hire a loan servicer to manage the debt collection process on their behalf.
This can be a high-risk, high-reward strategy, as there is no guarantee that the borrower will repay the debt. Thus, it’s crucial to conduct thorough due diligence on the underlying loan assets and borrowers before making any NPL investment decisions.
