What Is a Nonperforming Loan (NPL)?

By Markets & Investing DeskUpdated Nov 10, 2026

Definition

A nonperforming loan is a loan whose borrower has missed scheduled principal or interest payments for a set period, usually 90 days, or that the lender no longer expects to be fully repaid.

Key takeaways

Commercial loans are commonly treated as nonperforming after 90 days unpaid and some consumer loans after 180 days.
A loan can count as nonperforming without a formal default when the bank judges the borrower unlikely to pay.
The NPL ratio divides gross nonperforming loans by total gross loans, so $2 billion of $50 billion equals 4%.
The ECB expects unsecured parts of new NPLs fully provisioned within two years and secured parts within seven.

A nonperforming loan (NPL) is a loan on which the borrower has stopped making scheduled payments of principal or interest for a defined period, usually 90 days, or on which the lender no longer expects full repayment even if the 90-day mark has not been reached. In banking, “NPL” describes the status of the loan, not the borrower’s legal situation. A loan can become nonperforming long before any court, bankruptcy filing or repossession is involved.

How a Nonperforming Loan Works

Every loan begins as a performing loan: the borrower pays principal and interest on schedule, and the lender earns the expected income. Once a payment is missed, the loan is in arrears (delinquent). Arrears alone do not make a loan nonperforming. A borrower who is 15 or 30 days late and then catches up was delinquent, but the loan never crossed into NPL status.

The loan becomes nonperforming when it reaches the threshold set by the applicable framework. Commonly cited practice treats commercial loans as nonperforming after 90 days without payment and some consumer loans after 180 days, though the exact rule depends on the lender, the loan type and the regulator.

Default is a related but separate idea. A loan is in default when the lender considers the loan agreement broken and the borrower unable to meet the obligations. Many NPLs are also in default, but supervisory definitions can classify a loan as nonperforming without a formal default declaration, for example when a bank judges that the borrower is unlikely to pay.

For the lender, the change in status matters because the loan stops producing reliable income while still tying up capital. Banks typically set aside loan loss provisions against expected losses on these loans, which reduces reported earnings. Large NPL portfolios also weigh on regulatory capital, which is why supervisors watch them alongside measures such as the capital adequacy ratio.

Ways a loan becomes nonperforming

A debt can reach NPL status through several routes. The first three match the IMF’s statistical guidance:

Payments 90 days or more overdue. Principal or interest has gone unpaid past the threshold.
Interest capitalized, refinanced or delayed. If 90 days’ worth of interest has been added to the balance, refinanced or postponed by agreement or contract amendment, the loan can count as nonperforming even though no payment is technically “missed.”
Unlikely to pay. Payments are less than 90 days late, but there is good reason, such as a bankruptcy filing, to doubt the borrower will pay in full.
Matured but unpaid. The final maturity date has passed and part of the principal remains outstanding.

Official Definitions

European Central Bank

To assess risk consistently across the euro-area banks it supervises, the ECB treats an exposure as nonperforming if it is:

90 days past due, even if it is not defaulted or impaired.
Impaired under the accounting rules that apply to the bank (U.S. GAAP or International Financial Reporting Standards).
In default as defined by the EU Capital Requirements Regulation.

A 2018 addendum to the ECB’s NPL guidance set supervisory expectations for provisioning: unsecured portions of new NPLs should be fully covered within two years and secured portions within seven years.

Analysts scale NPLs to the size of the loan book:

NPL ratio = Gross nonperforming loans ÷ Total gross loans × 100

Two related measures appear in bank reports:

Net NPLs = Gross NPLs − Provisions held against those NPLs. This shows the exposure not already absorbed by reserves. The net NPL ratio divides net NPLs by total loans net of those provisions.
Coverage ratio = Provisions ÷ Gross NPLs × 100. A higher coverage ratio means more of the bad loans has already been expensed.

The NPL stock is the total amount of nonperforming loans on a bank’s balance sheet at a given date. It differs from new NPLs, the loans that moved into nonperforming status during a period. A bank can cut its stock by selling or writing off old NPLs while new ones keep arriving.

Worked example (hypothetical)

Assume a bank holds $50 billion in gross loans, of which $2 billion are nonperforming, and it has set aside $1.2 billion in provisions against those NPLs.

NPL ratio: $2 billion ÷ $50 billion = 4%
Net NPLs: $2 billion − $1.2 billion = $0.8 billion
Net NPL ratio: $0.8 billion ÷ ($50 billion − $1.2 billion) = about 1.6%
Coverage ratio: $1.2 billion ÷ $2 billion = 60%

The gross figure shows how much of the book has gone bad. The net figure shows how much potential loss is still not reflected in earnings. Two banks with the same 4% gross ratio can carry very different risk if one has 30% coverage and the other 80%.

Performing vs. Nonperforming vs. Reperforming Loans

Status	Payment situation	What it means for the lender
Performing	Payments on schedule	Expected income is being received
Nonperforming	Past the threshold (often 90 days) or unlikely to pay	Income has stopped or is doubtful; provisions are needed
Reperforming	Was nonperforming, payments have resumed	Income has restarted, but the loan carries a history of distress

A reperforming loan was delinquent for at least 90 days and is now being paid again, though the borrower need not be fully caught up. Many RPLs come from loan modifications or bankruptcy repayment plans. For example, a homeowner who fell behind may agree a modification that adds arrears to the balance, after which the mortgage is reperforming. An RPL may later return to fully performing status once it meets the conditions the lender or regulator sets.

Example of a Nonperforming Loan

A borrower loses their job and stops paying a personal loan. After 90 days with no payment, the lender reclassifies the loan as nonperforming and records a provision for the expected loss. The lender then has several options:

Work with the borrower. It may offer a modification, a lower payment or a repayment plan. If payments resume, the loan becomes reperforming.
Use a collections agency. The agency is typically paid a percentage of what it recovers.
Enforce collateral. For secured loans, the lender may repossess or foreclose on the asset and apply the sale proceeds to the balance.
Sell the debt. It can sell the loan to a debt buyer for a fraction of face value, taking an immediate loss but freeing up capital and staff time.
Write it off. If recovery looks unrealistic, the lender removes the loan from its books as a loss, though collection efforts may continue.

The borrower may also negotiate a settlement or partial forgiveness, which can still damage their credit record and make future borrowing harder and more expensive.

Why Banks Sell NPLs and Who Buys Them

Selling an NPL portfolio lets a bank lower its NPL ratio, release the capital and provisions tied to those loans, and focus on loans that generate income each month. Even at a steep discount, a sale can be worth more to the bank than years of costly collection with an uncertain outcome.

Buyers include other banks, specialist distressed debt investors and, for loans backed by property, real estate investors. They profit when what they recover exceeds what they paid plus their costs. As a hypothetical example, a fund that pays $20 million for loans with a $100 million face value and recovers $30 million through collections, restructurings and collateral sales, at a cost of $5 million, earns $5 million before financing costs. For secured loans, the value of the collateral relative to the debt, measured by the loan-to-value ratio, heavily influences the price buyers will pay.

Causes of Nonperforming Loans

NPLs tend to rise during economic downturns, when job losses, falling revenues and higher interest costs leave more borrowers unable to pay. Lender-side factors also play a role: loose underwriting standards, concentration in one sector or region, and lending against collateral whose value later falls. Rising rates on variable-rate debt can also push monthly payments beyond what borrowers can manage.

Limitations of the NPL Measure

Definitions differ. Thresholds of 90 or 180 days, varying “unlikely to pay” judgments and different accounting rules make cross-country comparisons imperfect.
It lags. A loan only counts after months of missed payments, so the ratio reflects past stress more than current conditions.
It can be managed. Restructuring, sales and write-offs reduce the reported stock without telling you how much the bank lost.

The Bottom Line

Anyone reading bank reports or tracking credit risk should look past the gross NPL ratio to provisions and coverage, since two banks with the same ratio can carry very different exposure. Differing definitions, reporting lags and the effect of sales and write-offs also limit how far the measure can be compared. For borrowers, a nonperforming loan can lead to collections, repossession or a sale of the debt, and settlements can still harm credit.