Non-performing loan.

In plain English

Once a loan is classified as non-performing, the bank stops accruing interest income on it and usually raises its reserves, and the loan may be restructured, sold, or written off. The 90 day threshold is a common convention rather than a universal rule, and loans in bankruptcy or judged unlikely to be repaid can be classified sooner. Banks report the ratio of non-performing loans to total loans, which is one of the standard measures of asset quality. A rising ratio can reflect either a weakening economy or looser underwriting a few years earlier. Recovery is still possible, since collateral can be sold and some borrowers resume paying.

01Why it matters

The ratio tells you whether a lender's loan book is deteriorating, and rising numbers across an industry usually mean credit is about to get harder to obtain for everyone.

02The math, step by step

Say a bank holds $50 billion of loans and $750 million are 90 days past due. That is a 1.5 percent non-performing ratio. If those loans carry a 6 percent rate, the bank also stops recognizing roughly $45 million a year of interest income it had been booking.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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