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 specified period. Although the exact elements of nonperformance status vary, depending on the specific loan's terms, "no payment" is usually defined as zero payments of either principal or interest. The specified period also varies, depending on the industry and the type of loan. Generally, however, the period is 90 days or 180 days.

How a Nonperforming Loan – NPL – Works

A nonperforming loan (NPL) is considered in default or close to default. Once a loan is nonperforming, the odds the debtor will repay it in full are substantially lower. If the debtor resumes payments again on an NPL, 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 the debtor has made zero payments of interest or principal within 90 days, or is 90 days past due. For a consumer loan, 180 days past due classifies it as NPL.

[Important: A nonperforming loan (NPL) is one in which payments of either interest or principal have not been made for a set number of days, for whatever reason.]

Types of Nonperforming Loans – NPLs

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

  • A loan in which 90 days' worth of interest has been capitalized, refinanced or delayed due to an agreement or an amendment to the original agreement.
  • A loan in which payments are less than 90 days late, but the lender no longer believes the debtor will make future payments.
  • A loan in which the maturity date of principal repayment has occurred, but some fraction of the loan remains outstanding.

Official Definitions of Nonperforming Loans – NPLs

Several international financial authorities offer specific guidelines for determining nonperforming loans.

The European Central Bank

For example, The European Central Bank (ECB) requires asset and definition comparability to evaluate risk exposures across euro area central banks. The ECB specifies multiple criteria that can cause an NPL classification when it performs stress tests on participating banks.

In 2014, in a comprehensive assessment, the ECB defined loans as nonperforming if they met any of the following criteria:

  1. are 90 days past due, even if they are not defaulted or impaired
  2. are impaired with respect to the accounting specifics for U.S. GAAP and IFRS banks
  3. are in default according to the Capital Requirements Regulation

An addendum, issued in 2018, specified the time frame for lenders to set aside funds to cover nonperforming loans: two to seven years, depending on whether the loan was secured or not. As of 2019, euro zone lenders still have approximately $990 billion worth of nonperforming loans on their books.

The International Money Fund

The International Monetary Fund (IMF) also sets out multiple criteria for a nonperforming loan classification, as part of of its "Financial Soundness Indicators Guide," first released in 2003. 

In 2005, the IMF defined nonperforming loans as loans whose:

  1. debtors have not paid interest and/or principal payments in at least 90 days or more
  2. interest payments equal to 90 days or more have been capitalized, refinanced or delayed by agreement
  3. payments have been delayed by less than 90 days, but come with high uncertainty or no certainty the debtor will make payments in the future.