Question

Explain how non-performing loans affect banks. (as much detail as possible)

Answer 1

Non performing loan means a loan which will reflect the default of the borrower and he hasn't made any scheduled payment of principal or interest for long period of time so banking and commercial loans are considered non performing, if the borrower has not paid past 90 days.

Non performing loan will be having an adverse impact on overall performance of the bank loan portfolio because it will mean that the Asset quality of bank is going to go lower.

The major source of income for banks are interest they are charging from the loans and when they are unable to collecct the interest from the borrower's, it will mean that they will have lesser money which are available on their books of account to create new loan and pay the operating cost

When there are a large number of non performing loans on the books of accounts of the bank, it will be posing a huge risk to the bank and these investors who are invested into the banks will be always looking for the healthy books of accounts so they will be putting the stock price down as there are dumping the share of the bank because of increase in the net non-performing loans and it will also be reducing the future profitability because lender is not going to earn income from the credit business.

so it can be said that when bank will have higher non performing asset it will mean that the bank will be having a higher risk associated with its long-term sustainability due to lesser income and decrease in share price, due to investor sentiment on the downside.