Non-performing loan (NPL)
A non-performing loan (NPL) is a loan on which the borrower has stopped paying as agreed, usually defined as 90 or more days past due or unlikely to be repaid in full.
In plain words
A loan is performing while payments come in on schedule, or close to it. It becomes non-performing when the lender no longer expects it to be repaid normally. The most common marker is 90 days past due, but a loan can be classed as NPL earlier if it is clear the borrower cannot pay, for example after bankruptcy or the loss of income.
How it is measured
The NPL ratio is the amount of non-performing loans divided by the total loan portfolio. If a company holds 1,000,000 in loans and 80,000 of them are NPL, the ratio is 8%. It is often shown together with the provisions set aside to cover expected losses on those loans.
Why it matters to an owner
NPL is where losses become real. A non-performing loan stops earning interest, requires reserves, ties up the collection team and lowers the value of the whole portfolio. Funders and buyers of a lending business look at the NPL ratio first. A growing ratio raises the cost of funding and reduces the price at which debt can be sold.
Options and risks
A lender can keep working the debt itself, restructure it, sell it to a third party or write it off. Each path has a price, and the decision is better made by comparing expected recovery with cost, not by habit. A common mistake is keeping NPL on the books for too long without active work: the debt ages, contacts go stale and the chance of recovery fades. Classification rules and reserve requirements differ by country and by type of lender, so they should be checked with a lawyer and an accountant.
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