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Non-Performing Loans (NPL)

Non-Performing Loans (NPL)
Non-Performing Loans (NPL)

We have data of Non-Performing Loans (NPL). Meaning, Types, Causes, and Consequences of Non-Performing loans. Normally, NPL is calculated by Bank and financial institutions in Nepal.

What are Non-Performing Loans (NPL)?

Meaning of NPL

Non-Performing Loans (NPL) is a sum of borrowed money that hasn’t been repaid in schedule in time. In other words, default in payment of loan by borrower is known as Non-performing Loan.

Every country has its own rules and regulations to classify the NPL. Normally, those loans which are not paid on time for 90 days or more than 90 days are categorized for NPL.

A non-performing loan is type of bad debt.

Read More: NPL of Microfinance Company: CLICK HERE

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 to 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 loans that has been overdue for a period of three to six months.

b. Doubtful Loan

= It is a loans 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 for more than 1 years. There is high chance of not paying the loans in future.

Loan Loss Provision

It is a amount set aside by banks and financial institutions to cover potential losses arising from non-performing loans. In Nepal, following are the different heading for classification of loans.

Loan Loss ProvisionTime or PeriodRate of Provision
Pass LoanNot Overdue or Overdue for 1 Months1%
WatchlistOver Overdue for more than 1 months but up to 3 months5%
SubstandardOverdue for more than 3 months but up to 6 Months25%
DoubtfulOverdue for More than 6 Months but up to 12 months50%
LossOverdue for more than 1 years100%

Additionally, it the non-performing loans are restructure than following are the rate of loan loss provision.

  • Pass Loan: 12.5%
  • Sub-standard: 25%
  • Doubtful: 50%
  • Loss: 100%

Causes of non-performing loans

Following are the causes of NPL:

  • The debtor losing his main income.
  • Being the bankrupt.
  • High interest rates.

Due 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, these are the information of Non-Performing Loans (NPL).

Other Important Links:

a. NPL of Commercial Bank: CLICK HERE

b. NPL of Finance Company: CLICK HERE

c. NPL of Development Bank: CLICK HERE

Frequently Asked Questions

What is 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.