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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Credit-impaired (stage 3)

What does credit-impaired (stage 3) mean, and how is interest then recognised?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A loan is credit-impaired, or in stage 3 under IFRS 9 expected credit loss accounting (used in the UK, and in Australia and New Zealand through their equivalent standards), once there is evidence that events hurting its expected cash flows have already happened, such as a default, serious financial difficulty or a concession the lender would not otherwise grant. It carries a lifetime loss allowance, as in stage 2, but interest income is then recognised on the loan net of that allowance. On a US$1 million loan at 8% with a US$400,000 allowance, the bank recognises US$48,000 of interest a year, not US$80,000.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WHAT IT IS NOT

A non-performing loan is a regulatory and management classification; stage 3 is the accounting one. They usually overlap, but different rules set them and they need not match loan for loan.

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