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What is a 'Nonperforming Loan - NPL'

A nonperforming loan (NPL) is a sum of borrowed money upon which the debtor has not made the scheduled payments for a period of time of usually at least 90 days for commercial banking loans and 180 days for consumer loans. Nonpayment means there has been zero interest or principal payments made on the loan within a specified period of time (90 to 180 days depending on industry and loan type). Any definition of a nonperforming loan will depend on the loan's particular terms and agreement.

BREAKING DOWN 'Nonperforming Loan - NPL'

A nonperforming loan (NPL) is either in default or close to default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If the debtor starts making payments again on a nonperforming loan, it becomes a reperforming loan, even if the debtor has not caught up on all the missed payments. In banking, commercial loans are considered nonperforming if zero payments, interest or principal, have been made within 90 days, or is 90 days past due. In consumer loans, 180 days past due are considered nonperforming loans.

Nonperforming Loan Types

One example of a nonperforming loan is when 90 (or 180) days worth of interest has been capitalized, refinanced or delayed due to an agreement. A second example of a nonperforming loan includes payments less than 90 (or 180) days late, but the lender no longer believes payment will be made. A third example of a nonperforming loan would be a loan in which the maturity date of principal repayment has occurred, but some fraction of the loan remains outstanding.

Besides not making an interest or principal payment within the specified window, the International Monetary Fund (IMF) recognizes multiple definitions of a nonperforming loan. The European Central Bank (ECB) specifies multiple criteria that can result in a nonperforming loan classification when the Bank performs stress tests on participating banks.

Central Bank Risk Applications

The European Central Bank (ECB) performs credit file reviews to determine if exposures are performing or non-performing. The ECB requires asset and definition comparability to evaluate risk exposures across euro area central banks.

In 2014, the European Central Bank (ECB) defined loans as nonperforming if any of the following criteria were met:

  1. Loans that are 90 days past-due even if it is not recognized as defaulted or impaired
  2. Loans that are impaired with respect to the accounting specifics for U.S. GAAP and IFRS banks
  3. Loans that are in default according to Capital Requirements Regulation
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