What is a non-performing loan?

Regulators and accounting standards emphasise different things. APRA's prudential reporting requires banks to identify impaired exposures and report arrears series and provisioning; it often flags 90 days past due but expects judgement where a borrower has deteriorated badly before then. IFRS 9, adopted through the AASB, uses an expected credit loss model with three stages, and an exposure that is credit-impaired sits in Stage 3. Market disclosure typically uses the 90-day line.

Because the definitions differ, a loan can be past due without being non-performing under IFRS 9 if forward-looking information does not indicate impairment, and a loan can be non-performing before 90 days if, say, the borrower is in default on covenants or has entered administration.

Risk drivers differ by portfolio. Residential mortgage NPLs usually carry a lower loss given default but move with the housing cycle. Commercial and corporate NPLs are more complex to restructure and depend on collateral quality, property development loans carry project and market risk, unsecured consumer loans attract higher provisioning, and asset finance and equipment finance NPLs depend on the resale value and location of a depreciating asset.

The core measures are the NPL ratio (non-performing loans divided by total gross loans), the coverage ratio (loan loss provisions divided by NPLs) and the provision rate to gross loans. Flow metrics, meaning new loans entering non-performing status each month or quarter, show new stress better than the stock figure, and the write-off rate shows realised losses.

The toolkit runs in rough order. Early engagement starts at the first missed payment or covenant breach: contact the borrower, ask for cashflow forecasts and assess hardship. Forbearance such as payment holidays, interest-only periods or reduced instalments preserves value but can delay loss recognition. Restructuring changes the term, the rate, the covenants or the amount owed, and a big enough change means the lender has to treat it as a new loan in its accounts.

Where the borrower is not viable the lender moves to workout and enforcement, including receivership, repossession and sale of collateral, weighed against legal cost and time. Distressed loans can be sold at a discount to investors that specialise in recovery, handed to a specialist servicer that collects for a fee, or packaged into securities priced on expected recoveries less servicing and legal costs. Loans with remote recovery prospects are written off, with tax deductibility depending on ATO rules.