2016/10/3 NPL (Non Performing Loans) Total NPL Calculation A non-performing loan is a loan that is in default or The total amount of the loan, not just the outstanding close to being in default loan balance when the loan was considered (By IMF)A loan is nonperforming when nonperforming, counts toward the nPl total 1) payments of interest and principal are past due Example: a borrower had a $100, 000 loan but repaid 40,000 on time, and went 90 days behind on hi by 90 days or more, ayments with $60,000 still due, the entire $100,000 2)or at least 90 days of interest payments have would be classified as a nonperforming loan delayed by If the borrower starts repaying the loan again after it agreement has been classified as nonperforming the loan is removed from the npl list there are other good reasons to doubt that payments will be made in full If the bank sells the loan to another agency fes l total collection the loan is also removed from the np NPL Ratio NPL Ratio NPL ratio is the NPl to total amount of outstanding perce Example: Bank xXX has a total loan portfolio of $200 illion with S5 million in NPL. The NPl rati 50000005200,000000)=(5/200)=0025,or Financial analysts frequently use the NPl ratio to compare the quality of loan portfolios among banks NPL LoSS Provision NPL Provision Coverage ratio For commercial banks unrecoverable npls are a The loan loss provision coverage ratio is an indicator major source of asset impairment. of how protected a bank is against future losses eet a Provision coverage ratio =(pretax income loan loss that represents a bank's best estimate of future loan amount of the loan that will never be rep Example: a bank extends a $500,000 5-year loan,one If the bank reported pretax income of $2, 500,000 year later the borrower runs into financial problems and a loan loss provision of $800,000 and net charge- If the bank believes the client will only repay 60% of offs of s500, 000, the loan loss provision coverage the borrowed amount the bank will record a loan atio=66(5250000+5800,000)/S500000,or loss provision of s200000=(100%-60%×S500,0002016/10/3 4 NPL (Non Performing Loans) • A non-performing loan is a loan that is in default or close to being in default. • (By IMF) A loan is nonperforming when: – 1) payments of interest and principal are past due by 90 days or more, – 2)or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, – 3)or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full 2-19 Total NPL Calculation • The total amount of the loan, not just the outstanding loan balance when the loan was considered nonperforming, counts toward the NPL total. • Example: a borrower had a $100,000 loan but repaid $40,000 on time, and went 90 days behind on his payments with $60,000 still due, the entire $100,000 would be classified as a nonperforming loan. • If the borrower starts repaying the loan again after it has been classified as nonperforming, the loan is removed from the NPL list. • If the bank sells the loan to another agency for collection, the loan is also removed from the NPL total. 2-20 NPL Ratio • NPL ratio is the NPL to total amount of outstanding loans in the bank's portfolio, usually expressed as a percentage. • Example: Bank XXX has a total loan portfolio of $200 million, with $5 million in NPL. The NPL ratio is: ($5,000,000/$200,000,000) = (5/200) = 0.025, or 2.5%. • Financial analysts frequently use the NPL ratio to compare the quality of loan portfolios among banks. 2-21 NPL Ratio 2-22 NPL Loss Provision • For commercial banks, unrecoverable NPLs are a major source of asset impairment. • The loan loss provision is a balance sheet account that represents a bank's best estimate of future loan losses. • Example: a bank extends a $500,000 5-year loan, one year later the borrower runs into financial problems. If the bank believes the client will only repay 60% of the borrowed amount, the bank will record a loan loss provision of $200,000= (100% – 60%) x $500,0002-23 NPL Provision Coverage Ratio • The loan loss provision coverage ratio is an indicator of how protected a bank is against future losses. • Provision coverage ratio =(pretax income + loan loss provision) / net charge-offs. A net charge-off is the amount of the loan that will never be repaid. • If the bank reported pretax income of $2,500,000 and a loan loss provision of $800,000 and net charge￾offs of $500,000, the loan loss provision coverage ratio = 6.6 (($2,500,000 + $800,000) / $500,000), or 660%. 2-24