NPL 

NPL 

Non-performing loans are those on which the borrower has defaulted on their repayment commitments, stopping the collection of interest and the repayment of principal. There are significant obstacles in this situation for both lenders and borrowers. The complexity of debt management and its vital role in financial institutions’ stability and health are made clear by examining the causes, effects, and potential remedies for non-performing loans. 

What is a NPL? 

A NPL is a loan that has stopped generating interest income or principal repayment for a predetermined period, typically 90 days or more. It indicates that the borrower still needs to meet their repayment obligations, making it risky for the lender. NPLs are usually found in the banking and financial sectors and can adversely affect the lender’s profitability and financial stability. These loans are categorised as non-performing because they do not contribute to the lender’s revenue stream. Managing NPLs is crucial for financial institutions as they impact their overall asset quality and creditworthiness. 

Understanding NPL 

A NPL is seen as defaulting or almost so. A debtor’s likelihood of returning a loan in full after it becomes non-performing is significantly reduced. Even if the debtor hasn’t made up all the missing payments, an NPL becomes a re-performing loan, or RPL, if the debtor starts making payments again.  

 When delinquencies are severe and there is economic hardship, NPLs are more likely to arise. They occur when a borrower misses a charge over an extended period (between 90 and 180 days). Real estate investors, as well as other banks, may think about investing in non-performing loans. 

 When a loan becomes non-performing, the lender must take steps to recover the debt. This may involve working with the borrower to devise a repayment plan, selling the loan to a debt collection agency, or foreclosing on the property. In the case of a mortgage loan, foreclosure is often the last option and can be a lengthy and expensive process for both the lender and the borrower. 

 To reduce the number of NPLs in their portfolios, financial institutions in the US may offer loan modifications or refinancing options to borrowers struggling to make their payments. These programs can help keep borrowers in their homes and reduce the risk of default for lenders. However, borrowers must contact their lenders when experiencing financial difficulties to explore all available options and avoid defaulting on their loans. 

How a NPL works? 

When a loan is declared non-performing, the borrower must keep up with the required repayments. The lender can designate the loan as NPL and take steps to reduce risk and recoup the remaining balance. These options include selling the loan to a collection agency, starting legal action, or modifying the debt. Effective management of NPLs is critical for financial institutions since it can harm the lender’s profitability and financial stability. 

Types of NPLs 

The following are the types of non-performing loans: 

  • Retail NPLs 

Retail NPLs are ones granted to individual consumers, such as personal loans, credit cards, or auto loans, where the borrower fails to make timely repayments. 

  • Corporate NPLs 

Corporate NPLs are those extended to businesses or corporations. It can include term loans, working capital loans, or trade finance facilities where the borrower cannot meet repayment obligations. 

  • Real estate NPLs 

Real Estate NPLs are associated with the real estate sector, such as mortgage loans, construction loans, or property development loans, where the borrower defaults on payments. 

  • SME NPLs 

Small and Medium Enterprise, or SME, NPLs refer to those granted to small businesses that cannot repay their loans due to financial difficulties. 

  • Sovereign NPLs 

Sovereign NPLs are those owed by governments or public entities where the borrower defaults on the repayment of debts or interest payments. 

Example of a NPL 

NPLs are a primary concern for financial institutions worldwide. NPLs loans pose a significant risk to the financial health of banks and other lending institutions. In the US, NPLs have become an important issue in recent years due to the economic downturn caused by the COVID-19 pandemic. 

An example of an NPL in the US would be a mortgage loan that has not been serviced for several months. This can happen if the borrower loses their job, experiences a medical emergency, or faces other unforeseen circumstances that prevent them from making their monthly mortgage payments. The loan will become non-performing if the borrower does not contact their lender to work out a repayment plan. 

In light of the above example, the scenario of a NPL is when a borrower obtains a mortgage loan from a bank but defaults on payments for more than 90 days. The borrower continues to default despite efforts made by the lender to recover the past-due amounts. The loan is thus categorised as non-performing because the bank no longer receives interest revenue from it. To reduce the risk and reclaim the unpaid balance, the bank may need to take steps like filing a lawsuit or modifying the loan. 

Frequently Asked Questions

A loan that has stopped producing income as a result of borrower failure is referred to as a NPL, whereas a loan that was previously delinquent but has come current again as a result of the borrower starting to make regular payments is referred to as a RPL. 

Banks may sell NPLs to other banks or investors. If the borrower resumes making payments, the loan can also start performing. The lender could seize the borrower’s collateral in different situations to cover the outstanding loan debt. 

NPLs can be brought on by various things, including borrower insolvency, economic downturns, unemployment, poor credit evaluation, lax loan monitoring, inadequate collateral valuation, or challenges unique to a particular sector that affect borrowers’ capacity to repay. 

Banks can sell NPLs to lower risk exposure, increase liquidity, and release capital for lending activities. Banks might shift the responsibility for collection and recovery to specialised organisations or investors by selling NPLs. 

A NPL can be resolved using various methods. These options can include debt restructuring, renegotiating the loan’s conditions with the borrower, filing a lawsuit, selling the loan to a collection company, or liquidating collateral to recoup the unpaid balance. 

    Read the Latest Market Journal

    Weekly Updates 26/2/24 – 1/3/24

    Published on Feb 28, 2024 52 

    This weekly update is designed to help you stay informed and relate economic and company...

    All-in-One Guide to Investing in China via ETFs

    Published on Feb 27, 2024 293 

    Start trading on POEMS! Open a free account here! Why China? In the vast landscape...

    Navigating the Post-Inflation Landscape in 2024: Top 10 US Markets Key Events to Look out for

    Published on Feb 23, 2024 323 

    Start trading on POEMS! Open a free account here! In 2023, the United States experienced...

    From Boom to Bust: Lessons from the Barings Bank Collapse

    Published on Feb 23, 2024 60 

    Barings Bank was one of the oldest merchant banks in England with a long history...

    Decoding FX CFD 2.0

    Published on Feb 20, 2024 66 

    This article is aimed at availing information and knowledge essential to intermediate forex traders. It...

    Weekly Updates 19/2/24 – 23/2/24

    Published on Feb 19, 2024 89 

    This weekly update is designed to help you stay informed and relate economic and company...

    Unlock Prosperity with 5 Sure-Fire Financial Instruments!

    Published on Feb 14, 2024 197 

    In Singapore, the concept of guaranteed returns may evoke the spirit of prosperity, reminiscent perhaps...

    Weekly Updates 12/2/24 –16/2/24

    Published on Feb 13, 2024 70 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com