A non-performing loan, abbreviated NPL, is a type of bank loan that is determined to be repaid late or is unlikely to be paid back by the borrower. This type of loan happens when borrowers do not have money to repay a loan or when they get into financial issues that make the loan repayment difficult for them. Generally, banks categorize a loan as a non-performing loan when the repayment date of interest and principal exceeds 90 days or the agreed date on the loan agreement.
Immediately after a loan is categorized as a non-performing loan, the chances of repayment of that loan are lower. Borrowers may, however, begin repayments for their loans even if they have been categorized as non-performing loans. In cases like this, the non-performing loan will be changed to a re-performing loan because the borrower has started making payments.
How Does a Non-Performing Loan Work?
A non-performing loan is a type of loan considered in default or close to default. Immediately after a loan is non-performing, the chances the borrower will repay the loan become thin. Also, if ever the borrower resumes the loan repayment, the loan becomes a re-performing loan. This is irrespective of whether the borrower has caught up on all the payments he missed or not.
Types of Non-Performing Loans
A borrower’s loan can be classified as a non-performing loan in different ways. This depends on the type of loan the borrower falls under. The types of non-performing loans are:
- Loans that are worth 90 days of interest that have been refinanced, capitalized, or delayed due to an amendment or agreement to the original loan agreement.
- Loans in which the maturity date of principal repayment has passed but a part of the loan is still outstanding.
- Loans with repayment dates of less than 90 days, but the lender no longer believes that the loan will ever be repaid by the borrower.
Borrowers who fall under any of these types will be classified as non-performing loans.
How Lenders Manage Non-Performing Loans
Meanwhile, Lenders can manage non-performing loans in different ways, depending on the situation. They may take repossession of the loan’s collateral, restructure the debts, or sell the loan at a discount to other banks or investors.
Repossession of Collateral:
If the loan is a mortgage loan, the lender can take repossession of the loan and sell it to pay off your loan debt.
Restructure the Debt:
The lender may lower the loan’s interest rates, and charge off some principal. Or even increase the loan’s term length to make payments more affordable for the borrower.
Enforce a Third-Party Guarantee:
A guarantee is an agreement made with a guarantor to repay the loan if the borrower ever defaults on the loan. In this case, the guarantor will have to pay off the loan balance.
Sell the Loan at a Discount:
Finally, if the borrower defaults, the lender can sell the loan to a collection agency, which will take over the task of recovering the debt.
If a borrower starts making payments again, a non-performing loan can be converted back to a performing loan, improving its status.
What happens to Non-Performing Loans?
Non-performing loans are sold to other banks or investors by banks. Also, the loan may become reperforming if the borrower begins paying for it. Other times, the lender may repossess the collateral of the borrower to pay off the loan balance.
What are the Causes of Non-Performing Loans?
This loan occurs when the borrower is unable to repay the loan due to some financial issues or hardship. If the borrower fails to repay the loan in a long time, usually 90 to 180 days. Or the grace period agreed on in the loan agreement, the loan will be categorized as a non-performing loan.
Do Banks Sell Non-Performing Loans?
To optimize their portfolio, banks may sell non-performing loans. And shift their attention to performing loans that provide a steady stream of monthly revenue. Selling these loans at a discount to other banks or investors may be more profitable to them than receiving them from the borrower.
Who Buys Non-Performing Loans?
These loans are purchased by banks, distressed debt investors, or real estate investors. These investors may consider investing in non-performing loans.
How do you Solve Non-Performing Loans?
The only way to solve this loan problem is to get back on track with the repayments. You can do this through a loan modification agreement with the lender.