NPL stands for Non-Performing Loan. It is a term commonly used in the field of finance and banking to refer to a debt or loan that has not been repaid as per the agreed terms and conditions. In other words, it is a loan where the borrower has failed to make principal and interest payments for a certain period, typically 90 days or more, resulting in financial distress for the lender.
When a loan becomes non-performing, it poses significant risk and financial implications for the lending institution. The non-payment of a loan can occur due to various reasons, such as borrower's insolvency, lack of profitability in a business venture, economic downturn, or other unforeseen circumstances leading to financial distress.
Financial institutions often classify their loans into performing and non-performing categories to assess their asset quality and potential losses. Non-performing loans indicate a negative impact on the lender's balance sheet, as they become assets that are not generating the expected returns and pose a higher risk of default.
Financial institutions typically undertake efforts to manage and recover non-performing loans, which may involve renegotiating repayment terms, collateral liquidation, or legal actions to reclaim the outstanding amount. Resolving NPLs is crucial to minimizing losses, stabilizing the financial system, and maintaining the overall health of the banking sector.
Overall, NPLs are a critical metric in assessing the quality of a financial institution's loan portfolio and its overall financial stability.
