Non-performing loans (NPL) are loans in which the recipient is in default and has not remitted the monthly loan repayments for a specified period. Although the exact features of non-performing loans can vary depending on loan agreements, industry and type of credit granted. The terms “no payment” is usually defined as null payments of either principal or interest in a given period.
How Does A Non-Performing Loan Work?
When a loan is listed as non-performing, it is considered a default. The chances of recovering such loans from a debtor in full are extremely low. However, if the debtor resumes payments again, it becomes a reperforming loan, regardless of the status of the default payments.
In the banking sector, commercial loans in Nigeria are considered non-performing if the borrower has made no loan repayments within 90 days. On the other hand, for a consumer loan, 180 days without payments classifies it as a non-performing loan.
However, it is essential to note that there is a slight difference between a loan in arrears or default. A loan is in arrears when the principal or interest payments are delayed or completely missed. While a loan is in default when the debtor is unable to meet his obligations – the lender at this point considers the loan agreement to be broken by the debtor.
How Banks Handle Nonperforming Loans
Generally, non-performing loans are regarded as bad debts because the chances of loan repayments are quite minimal. As a result, having more non-performing loans in the Bank’s records affect it’s cash flows negatively. This could ultimately harm the Bank’s stock price. Therefore, they may have to take precise actions to enforce and ensure the recovery of the loans.
If it’s an asset-based loan, one action is taking possession of assets pledged as security for the loan. For instance, if the borrower uses his landed properties as collateral for the loan, the lender will take possession of the land. The Bank then puts the property up for sale to recover the amount owed by the borrower.
Banks may also redeem the right of the mortgage on homes where the borrower has failed to meet his mortgage obligations. This can only be done after the number of days due, as stated in the loan agreement has expired.
The lender also has the option to sell the non-performing loans to collection agencies to get rid of such loans from their balance sheet. The Bank will sell the non-performing loans at discounts, and the collection agencies will try to retrieve the defaulted loans. Alternatively, the Bank can also enlist the services of a collection agency to enforce the recovery of such credit. A small percentage is charged in exchange for their services.
Types of Nonperforming Loans
Debt can be regarded as “non-performing loan” in any of the circumstances stated below;
- Loan repayment of principal and interest are at least 90 days due, and the lender now believes the borrowers will not honour their debt obligations. The loan is recorded as a bad debt in the books
- Ninety days’ worth of interest payments is refinanced, delayed or capitalized due to adjustments in the loan agreement.
- A loan in which the principal repayment date has matured, but some part of the loan remains outstanding.
The non-performing loans to Loans Ratio help ascertain the tension in a portfolio of varied loans. The higher the ratio, the more danger the lender is for having that portfolio.
The non-performing loan ratio is the ratio of the number of non-performing loans in a bank’s loan database to the total amount of outstanding loans the Bank holds.