What defines a 'non-performing loan' (NPL)?

What defines a 'non-performing loan' (NPL)?

• A. A loan that is fully paid off
• B. A loan on which the borrower is not making interest payments or repaying any principal
• C. A loan that has been restructured
• D. A loan that is backed by collateral

Answer: (B)

A non-performing loan (NPL) is characterized by a situation where the borrower is unable to make the required payments of interest or principal on the loan. This typically means that the loan is at least 90 days overdue, or that the borrower has defaulted. NPLs are of significant concern to banks and financial institutions as they represent a credit risk and can adversely affect their financial health. The definition provided in the correct choice accurately captures the essence of an NPL, focusing on the lack of repayment activity by the borrower. Understanding this concept is crucial for financial institutions in managing assets and assessing the overall quality of their loan portfolios. Other choices describe scenarios that do not accurately represent non-performing loans. For example, a fully paid-off loan indicates a successful completion of repayment and does not fit the definition of non-payment. Similarly, a restructured loan might involve adjustments to the terms to help the borrower meet payment obligations, whereas a loan backed by collateral indicates a secured lending scenario that does not inherently reflect any default or non-performance. Each of these alternatives highlights different aspects of lending but fails to align with the specific conditions that designate a loan as non-performing.

A non-performing loan (NPL) is characterized by a situation where the borrower is unable to make the required payments of interest or principal on the loan. This typically means that the loan is at least 90 days overdue, or that the borrower has defaulted. NPLs are of significant concern to banks and financial institutions as they represent a credit risk and can adversely affect their financial health.

The definition provided in the correct choice accurately captures the essence of an NPL, focusing on the lack of repayment activity by the borrower. Understanding this concept is crucial for financial institutions in managing assets and assessing the overall quality of their loan portfolios.

Other choices describe scenarios that do not accurately represent non-performing loans. For example, a fully paid-off loan indicates a successful completion of repayment and does not fit the definition of non-payment. Similarly, a restructured loan might involve adjustments to the terms to help the borrower meet payment obligations, whereas a loan backed by collateral indicates a secured lending scenario that does not inherently reflect any default or non-performance. Each of these alternatives highlights different aspects of lending but fails to align with the specific conditions that designate a loan as non-performing.