A non-performing asset (NPA) is a debt instrument where the borrower has not made any previously agreed-upon interest and principal repayments to the designated lender for an extended period of time. The non-performing asset is, therefore, not yielding any income to the lender in the form of interest payments.
Breaking Down Non- Performing Asset
For example, a mortgage in default would be considered nonperforming. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lender might write off the asset as a bad debt and then sell it at a discount to a collection agency. Top MBA college in Bangalore
Banks usually categorize loans as non-performing after 90 days of non-payment of interest or principal, which can occur during the term of the loan or for failure to pay principal due at maturity. For example, if a company with a $10 million loan with interest-only payments of $50,000 per month fails to make a payment for three consecutive months, the lender may be required to categorize the loan as nonperforming to meet regulatory requirements. A loan can also be categorized as nonperforming if a company makes all interest payments but cannot repay the principal at maturity.