A loan that carries a very high risk of default (100% probability of default), with the worst credit grade on an applicable scale. As the name implies, non-performing loans are those that do not function as intended in terms of full and timely payment of interest and repayment of principal.
Non-performing loans are associated with the risk of late repayment or are unlikely to be repaid by the borrower. Under accounting standards, non-performing loans are classified as risk elements in lending and potential problem loans (IAS) or stage 3 (IFRS).
Non-performing loans have historically been on the rise during financial crises and economic downturns and the subsequent recessions. Banks, at crisis time tend to witness a build-up of such loans in their books.
Non-performing loans are known for short as NPLs.
Comments