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What is 'Nonperforming Loan - NPL'

A nonperforming loan is a sum of borrowed money upon which the debtor has not made the scheduled payments for a period of usually at least 90 days for commercial banking loans and 180 days for consumer loans. Nonpayment means there have been zero interest or principal payments made on the loan within a specified period — generally, 90 to 180 days depending on industry and loan type. Any definition of a nonperforming loan will depend on the loan's terms and agreement as there is no definitive definition of a nonperforming loan - NPL. 

BREAKING DOWN 'Nonperforming Loan - NPL'

A nonperforming loan is 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 makes 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 mad  zero payments, interest or principal within 90 days, or is 90 days past due. In consumer loans, 180 days past due are considered NPLs.

Nonperforming Loan Types

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

European Central Bank and International Monetary Fund Applications

The European Central Bank 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. The ECB specifies multiple criteria that can cause an NPL classification when it performs stress tests on participating banks.

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

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

The International Monetary Fund recognizes multiple criteria that could cause an NPL classification as adapted from the Financial Soundness Indicators Guide's definition. 

In 2005, the International Monetary Fund (IMF) defined nonperforming loans - NPLs as loans that:

  1. 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 there is high uncertainty or no certainty the debtor will make payments in the future

Both the ECB and IMF include the same definition of an NPL as any loan that has not made principal or interest payments in at least 90 days.

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