We have data on Non-Performing Loans (NPL). Meaning, Types, Causes, and Consequences of Non-Performing Loans. Normally, NPL is calculated by banks and financial institutions in Nepal.
What are Non-Performing Loans (NPL)?
Meaning of NPL
Non-Performing Loan (NPL) is a sum of borrowed money that hasn’t been repaid in schedule in time. In other words, default in payment of the loan by a borrower is known as a Non-performing Loan.
Every country has its own rules and regulations to classify the NPL. Normally, those loans that are not paid on time for 90 days or more than 90 days are categorized for NPL.
A non-performing loan is a type of bad debt.
Example of NPL
Suppose, “ABC” commercial bank granted Rs. 5 crore to XYZ Pvt Ltd. The agreement was for XYZ Pvt Ltd to repay in monthly installments of Rs. 500,000 per month. The XYZ Pvt Ltd regularly paid the installment for 2 years. Due to different problem in Company. The company went bankrupt.
The XYZ company is not able to pay the loan for 3 months. The Commercial bank ABC started to keep the loan in NPL.
Types of Non-Performing Loans
There are three types of Non-Performing Loans. They are:
- Sub-standard Loans
- Doubtful Loans
- Loss Loans
a. Sub-Standard Loan
It is a loan that has been overdue for a period of three to six months.
b. Doubtful Loan
= It is a loan that has been overdue for a period of six months to 12 months. Here, the repayment of loans is uncertain.
c. Loss Loans
= It is a loan that has been overdue for a period of more than 1 year. There is a high chance of not paying the loans in the future.
Loan Loss Provision
It is an amount set aside by banks and financial institutions to cover potential losses arising from non-performing loans. In Nepal, the following are the different headings for the classification of loans.
| Loan Loss Provision | Time or Period | Rate of Provision |
|---|---|---|
| Pass Loan | Not Overdue or Overdue for 1 Month. | 1% |
| Watchlist | Overdue for more than 1 month but up to 3 months. | 5% |
| Substandard | Overdue for more than 3 months but up to 6 Months. | 25% |
| Doubtful | Overdue for More than 6 Months but up to 12 months. | 50% |
| Loss | Overdue for more than 1 year. | 100% |
Additionally, if the non-performing loans are restructured then the following are the rates of loan loss provisions.
- Pass Loan: 12.5%
- Sub-standard: 25%
- Doubtful: 50%
- Loss: 100%
Causes of non-performing loans
The following are the causes of NPL:
- The debtor losing his main income.
- Being the bankrupt.
- High interest rates.
Due to these reasons, the borrowers are not able to pay the loan on time.
Consequences of non-performing loans
Following are the consequences of non-performing loans.
- Negatively impact credit supply and demand.
- NPLs reduce interest income due to which revenue will be decreased.
- Risk to banks’ balance sheet health and financial soundness.
Hence, this is the information on Non-Performing Loans (NPL).
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Frequently Asked Questions
What is the meaning of non-performing loans (NPL)?
= Non-performing loans are loans where the borrower has failed to make payments for a specified period, normally exceeding three months.
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