Non-performing assets are loans that are at risk of default due to changes in the borrower’s financial situation. Loans exceeding 90 days with no payment are classified as non-performing. Lenders work with borrowers to prevent default. Late payments do not necessarily make a loan non-performing. Lenders classify a loan as non-performing only when the borrower has not made any payment for three consecutive months. Lenders try to work with borrowers before taking legal action.
Also known as non-performing loans, non-performing assets are loans that demonstrate an increased risk of default, usually due to changes in the borrower’s financial circumstances. Typically, any loan that exceeds ninety days with no payment made on the outstanding balance will be classified as a non-performing asset. Since lenders depend on the interest generated by these loans as part of their income stream, steps are usually taken to work with the borrower in an effort to prevent default from occurring.
It is important to note that if a debtor is a few days late on a monthly payment, this does not constitute a need to declare the loan as a non-performing asset. Many lenders charge late fees which are added to the amount already owed, effectively allowing that late payment to still generate income for the payment recipient. If the borrower is a few days late making loan payments for several consecutive months, the lender may be a little concerned and see the loan as an increasing risk, but not enough to be classified as non-performing.
While there are exceptions, many lenders classify a loan as a non-performing asset only when the borrower has not attempted to make any type of payment on the debt for a minimum of three consecutive months. For example, if the borrower lost his job and was unable to make full payments, but made the interest payments while looking for work, the lender would still view the loan as some sort of yield. If the borrower makes no effort to work with the lender to arrange some kind of payment on interest or a principal, and the dates for three consecutive monthly installments pass with no payments remitted, then the loan is officially a non-asset. performing.
Because the next step after declaring a loan as impaired is collecting and possibly placing a lien on the debtor’s assets, lenders will often attempt to work with debtors who are experiencing a temporary financial crisis. Both collection efforts and legal action through a court system cost the lender time and money and are not normally used until all other options have been exhausted. With proper management and willingness on the part of both the debtor and the creditor, it is often possible to prevent the situation from escalating to a critical level and allow the relationship to return to a mutually beneficial state.
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