A nonperforming loan (NPL) is a loan that is in 

default due to the fact that the borrower has not made the scheduled payments for a specified
period. Although the exact elements of nonperforming status can 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.

KEY TAKEAWAYS
 A nonperforming loan (NPL) is a loan in which the borrower is in default and hasn't made any scheduled payments of principal or
interest for a certain period of time.
 In banking, commercial loans are considered nonperforming if the borrower is 90 days past due.
 The International Monetary Fund considers loans that are less than 90 days past due as nonperforming if there's high uncertainty
surrounding future payments.
 However, there is no standard or definition of NPLs.
 Some banks opt to sell NPLs to other banks or investors to free up capital and/or focus on performing loans that bring in income.
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Nonperforming Loan

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 (RPL), 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 an NPL.

A loan is in arrears when principal or interest payments are late or missed. A loan is in default when the lender considers the loan agreement
to be broken and the debtor is unable to meet the obligations.

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.

 
The Fair Debt Collection Practices Act prohibits certain abusive or deceptive practices in order to collect on nonperforming personal loans.
However, this law only applies to third-party debt collectors or debt investors, not the original lender.1

Official Definitions of Nonperforming Loans (NPLs)

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

The European Central Bank Definition

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. The ECB has
performed a comprehensive assessment and developed criteria to define loans as nonperforming if they are:

 90 days past due, even if they are not defaulted or impaired

 Impaired with respect to the accounting specifics for U.S. GAAP and International Financial Reporting Standards (IFRS) banks
 In default according to the Capital Requirements Regulation2

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 2020, eurozone lenders still have approximately $1 trillion worth of nonperforming
loans on their books.3

The International Monetary Fund Definition

The International Monetary Fund (IMF) also sets out multiple criteria for nonperforming government loans.4

The IMF has defined nonperforming loans as those whose:

 Debtors have not paid interest or principal payments in at least 90 days or more
 Interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement
 Payments have been delayed by less than 90 days, but come with high uncertainty or no certainty the debtor will
make payments in the future5

 
Nonperforming loans may damage the credit rating of the borrower, making it harder and more expensive to borrow money in the future.

Nonperforming Loan (NPL) vs. Reperforming Loan

(RPL)
Nonperforming loans are those in default. Reperforming loans are those that were once nonperforming and are now performing again. The
reperforming loans were once delinquent for at least 90 days and are now performing again.

Reperforming loans are often loans where the borrower has filed for bankruptcy and has continued to make payments as a result of
the bankruptcy agreement. Such an agreement generally allows the borrower to become current on their debt via a loan modification
program.

Example of a Nonperforming Loan (NPL)

Imagine a hypothetical borrower who cannot make loan payments due to job loss. After 90 days without payment, the bank or lender will
consider the loan nonperforming. The bank would shift the loan to their nonperforming list and continue seeking payment for the debt.

There are multiple avenues available to the creditor. One of the most common ways to collect the debt is to send it to a collections agency,
which will be paid a percentage of any money they recover. The lender can also sell the debt to a debt buyer at a fraction of the face value.
Although the creditor will lose money, this is often a better financial choice than trying to collect on a nonperforming loan.

Borrowers with nonperforming loans may be able to negotiate with creditors to forgive part of their debt. However, this may damage their
credit rating, making it harder and more expensive to borrow in the future.

What Happens to Nonperforming Loans?

Nonperforming loans can be sold by banks to other banks or investors. The loan may also become reperforming if the borrower starts
making payments again. In other cases, the lender may repossess the borrower's collateral the satisfy the loan balance.

What Are the Causes of Nonperforming Loans?

Nonperforming loans tend to occur during economic hardships when delinquencies are high. They happen when the borrower fails to make a
payment for a long period of time (such as 90 to 180 days).

Non-performing loans soared to a new high at Tk 1.34 trillion at the end of September, in what economists describe as "governance
failure" in Bangladesh's banking system.

The amount is 9.36 per cent of the total outstanding loans in the banking sector.

The figure of bad loans in the banking system in the first half of the current calendar year was Tk 1.25 trillion, according to
Bangladesh Bank statistics.

The statistics show that the NPL belonging to the state-owned commercial banks reached Tk 605.01 billion, which is 23.04 per cent of
their total outstanding loans during the period under review while the same in the private commercial banks ballooned to Tk 666.95
billion, 6.20 per cent of their total outstanding loans.

The overall size of NPL of specialised banks was recorded at Tk 44.77 billion, 11.80 per cent of their total outstanding loans. The
volume of the classified credits in the foreign banks reached Tk 29.70 billion or 4.77 per cent of their total outstanding loans.

Economists and bankers have identified poor governance in the banking sector coupled with the culture of apathy to repay borrowed
money as key factors for the leaps in NPL.

"It's a complete governance failure in the banking system," says economist and former adviser of a caretaker government Dr AB Mirza
Azizul Islam.

He goes on: "Many borrowers show the attitude that they need not repay the loan and face no punishment either. So, they are reluctant
to repay their debts."

On many occasions, loans are often sanctioned or given based on the nexus among directors of different banks, he observed.

"It seems that there has been an unholy practice among the lenders that you (sponsors) will borrow from me and don't need to repay and
I will borrow from you and you won't force me to repay," he says, indicating insider lending.

Besides, many borrowers are politically well-connected also, he adds.

Banking sources, however, attribute such rise in the bad loans to, among others, lower loan-recovery rate and prevailing turmoil in
trade and economy, especially the forex-market volatility.

According to them, usually the NPL trend remains comparatively high in the first and third quarters of the calendar year.

Managing Director and Chief Executive Officer of Mutual Trust Bank Limited Syed Mahbubur Rahman blames the prevailing overall
economic recession, inflationary pressure and the Covid-induced shocks as the prime factors behind the growing volume of classified
credits.

Spending by people has gone up significantly in recent times because of the inflation and they refrain from buying other commodities
excepting the key essentials, he points out.

"Because of the factors, the loan-rescheduling facility given to the borrowers is not working. These factors have pushed up the volume
of NPL in the banking system," he told the FE.

He also said the ongoing fluctuation in the foreign currencies also caused many companies to incur losse