Introduction

Non Performing Loan is a loan in which the borrower has not made repayments of principal and loan interest for at least 90 days. When a bank is unable to recover non-preforming loans, it can repossess assets pledged as collateral or sell off the loans to collection agencies. When a bank has too many non- performing loans in its balance sheets, it poses cash flow problems for the bank since it is no longer earning income from its credit business.

Types of Non-performing Loans.

According to the international Monetary Fund (IMF), a loan can become non-performing id following ways:

Loan installments of principal and interests are at least 90 days due, and the lender no longer believes the borrowers will honor their debt obligation. Bad debt.
90 days' worth of interest payments are capitalized, refinanced, or delayed due to changes in the loan agreement.
Payments of principal and interest are less than 90 days overdue, and there are reasons to doubt that the borrower will not pay the outstanding loan in fuel.

Impacts of Non Performing Loans on Banks

Lender/Banker will have less money available to create new loans and pay operating costs.
It affects the profitability of the lender.
When the percentage of NPL increases, Lender's stock price will also go down. Less attractive to potential investors.
Also, the lender will be required will be required to set aside a portion of its profits as bad debts provisions in case it is required to write off the debts.

How banks Handle Non Performing Loans

Lenders can take possessions of assets pledged as collateral for the loan.
Bankers may also foreclose on homes where borrowers fail to honor their mortgage obligations, and the repayments become due for more than 90 days.
Lender may also opt to sell the NPL to collection agencies and outside investors to get rid of risky assets.

Non Performing Loans to Total Loan Ratio

High ratio means bank is at a greater risk of loss if it doesn't recover the owed loan amounts.
Small ratio means the bank is at low risk.

WHAT IS NON PERFORMING LOAN (NPL)

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