Non-Performing Loan (NPL)
A bank loan on which the borrower has stopped making scheduled payments, typically defined as 90 or more days past due.
What is Non-Performing Loan?
A non-performing loan (NPL) is a bank loan that is in or near default, typically defined under international banking standards as a loan where the borrower has failed to make scheduled principal or interest payments for 90 or more days. NPLs are also called bad loans or problem loans. The NPL ratio — non-performing loans divided by total loans — is a key metric of bank asset quality watched closely by regulators, analysts, and depositors. High NPL ratios strain bank profitability, require larger loan loss provisions, erode capital, and can restrict a bank's ability to make new loans. Banks either write off NPLs after exhausting collection efforts or sell portfolios of NPLs to distressed debt investors at a discount.
Example
Following the European debt crisis (2010–2012), Italian and Greek banks accumulated NPL ratios exceeding 15–20% of total loans, far above the EU average. The European Central Bank required these banks to accelerate NPL resolution by writing off bad loans, selling NPL portfolios, and raising additional capital. Italy's NPL resolution stretched over nearly a decade and required government-backed bad bank mechanisms to clean bank balance sheets.