Explanation: What is a non-performing loan (NPL)?


A non-performing loan (NPL) is a loan in which the borrower is in default and has not made monthly principal and interest payments for a specified period.

When principal and interest repayments are over 90 days past due or according to the terms of the loan agreement, banks generally classify the loans as non-performing. When a loan is classified as a non-performing loan (NPL), the chances of receiving repayments are significantly reduced.

Non-Performing Loan (NPL) vs Reproducible Loan (RPL)

A borrower can begin making payments on debt previously designated as non-performing. The non-performing loan becomes a re-performing loan in such cases.

Defaulted loans are called non-performing loans. Loans that were previously non-performing but are performing again are called reproductive loans. Reproductive loans were previously at least 90 days past due and are now in good standing.

The current state of the NPL in Nigeria

The Non-Performing Loan (NPL) ratio of Nigerian commercial banks fell from 4.84% in February 2022 to 5.3% in April 2022. According to data from the Central Bank of Nigeria, this is the case.

Since the NPL ratio calculates the percentage of bank loans that are not managed effectively or have gone bad entirely. Therefore, the apex bank said more work needs to be done to reduce NPLs below its prudential limit of 5.0%.

The CBN said: “The non-performing loan (NPL) ratio stood at 5.3% in April 2022, against its prudential limit of 5.0%, reflecting a lasting stability of the banking system, even if it remains necessary to bring it back to normal. prudential limit. ”

The NPL ratio is an essential measure for assessing the health of the banking system. If the NPL exceeds the prudential limit, it may suggest that commercial banks have more underperforming loans than expected, due to the inability of the private sector to service the loans.

How banks deal with non-performing loans

Non-performing loans are often considered bad debts because the chances of recovering missed loan installments are slim.

On the other hand, having more non-performing loans on the balance sheet reduces the bank’s cash flow and stock price. Therefore, banks that have non-performing loans on their books can take action to enforce the collection of amounts owed to them.

Lenders can take possession of assets pledged as collateral for a loan among several options. For example, if the borrower has pledged a car as collateral, the lender will seize the car and sell it to collect any debt owed by the borrower.

When debtors fail to meet their mortgage obligations for more than 90 days, banks can seize their assets. To get rid of problem assets from its balance sheet, the lender can sell non-performing loans to collection agencies and other investors.

Banks sell non-performing loans at deep discounts and collection agencies try to collect as much of the money owed as possible. In exchange for a percentage of the amount collected, the lender can hire a collection agency to enforce collection on a delinquent loan.

Effects of NPLs on banks

When a lender’s non-performing loan represents a substantial percentage of its outstanding loans, it can adversely affect the lender’s financial performance. Banks mainly profit from the interest they charge on loans. Therefore, when they are unable to collect outstanding interest payments from NPLs, they will have less money available to issue new loans and cover operating expenses.

The money represents revenue that could be lost and this impacts the profitability of the lender. This not only affects the lender, but also limits the number of potential borrowers who can obtain loans from the lender. Holding a large number of non-performing loans (NPLs) across a company’s total assets poses a significant risk to the organization.

Potential investors want to invest their money in organizations that have strong finances. When the percentage of non-performing loans goes up, the lender’s stock price also goes down. The more NPLs a bank has on its books, the less attractive it is to potential investors, as its future profitability will suffer if the lender does not earn income from its lending business.

At the end of the line

  • Banks are required by law to report their ratio of non-performing loans to total loans as an indicator of their credit risk and the quality of outstanding loans. A high ratio indicates that the bank has a greater risk of loss if outstanding loan amounts are not collected, while a low ratio indicates that outstanding loans pose minimal risk to the bank.
  • In times of economic instability, the number of non-performing loans tends to increase. Borrowers who do not (or cannot) repay their loans are considered defaulters. If no payment is received for a certain amount of time (usually 90 or 180 days, depending on the lender), the loan becomes non-performing.


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