At what point is a loan classed as non-performing?

When it reaches 90 days past due under the local test, or earlier if the bank judges that the borrower will not pay in full unless the security is sold. Australia counts 90 days or more; the UK and New Zealand's IRB banks use more than 90 days on a material amount. The second test needs no arrears, so a borrower with every payment current can still be non-performing, for example after the loss of a major customer.

Can a non-performing loan become performing again?

Yes, on evidence. Basel's guidelines ask that no material exposure is more than 90 days overdue, that payments have been made on time for a continuous period of at least three months as the supervisor sets it, that full repayment is now likely, and that the exposure is no longer defaulted or impaired. Australia requires at least 90 days, or six months for a restructured loan. Writing off part of the debt or repossessing collateral does not qualify.

What is a high non-performing loan ratio?

There is no single line. European guidelines treat a gross ratio of 5% or more as a trigger for extra work on a bank's non-performing book, but the UK's Prudential Regulation Authority has not adopted that figure. A ratio is better read against the same bank's history, its peers with similar lending, how quickly it writes loans off, and the security behind them. A low ratio at a bank that renews weak loans freely tells a reader very little.

What happens to a non-performing loan?

The bank moves it to specialists who decide among a restructure, a refinance elsewhere, a sale of assets, enforcement of the security, or selling the loan to another investor, generally choosing whichever is expected to recover the most. A provision covers the expected shortfall in the meantime. Once the bank has no reasonable expectation of recovering a balance, that part is written off and leaves the books. Some non-performing loans do recover and return to performing.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Non-Performing Loan: a Worked Example

Every payment is up to date. The loan is non-performing anyway.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 5 MIN READ

// THE SHORT ANSWER

Calling a loan non-performing is a decision about what will happen next, and it moves everything that borrower owes into a different column of the bank's books. Reaching the 90-day mark in arrears forces the decision. A judgement that the bank will be repaid only by selling the security can force it sooner. A sauce and condiments maker that has lost its largest customer can be non-performing with every instalment paid and with security worth more than the debt. The label then changes the provision, the interest the bank reports, the capital it holds and who manages the file.

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.

// MAKE THE CALL

Issue 09 — The Tuesday List. Eight dashboards. Two intensive-care slots. Portfolio triage, Tuesday 8:30am. Your call first, then the senior banker's.

Read the file →

PART OF When Your Loan Goes to the Workout Team

// 01 — THE TWO ROUTES IN

One route is a count. A borrower reaching 90 days past due on a credit obligation is non-performing; the three markets differ on the day and on how much must be overdue, as the 90-day page sets out. The other route is a judgement: the bank considers full repayment unlikely without realising the security. The default definitions list the judgement first, and it can come first in the file.

Non-performing if EITHER

90 days past due (the exact test varies by market)

OR full repayment unlikely unless the security is sold

Measured on: the whole exposure, not the overdue part

Security: does not change the label; it changes the loss

Collateral is kept out on purpose. The Basel Committee's guidelines and Australia's APS 220 both say security should not directly influence the classification, because a well-secured loan that is failing is still failing. Both measure the whole exposure, and off-balance-sheet items count at their whole nominal amount, which Basel words as the amount that cannot be cancelled.

The level at which the label attaches varies. Basel's guidelines work borrower by borrower, with an option to go transaction by transaction for retail. In Australia a business borrower is classified as a whole, and only exposures to individuals may be taken obligation by obligation. In the UK and at New Zealand's IRB banks, small-business lending in the retail class may be assessed facility by facility, and a New Zealand bank on the standardised approach classifies asset by asset.

// 02 — WHAT THE LABEL CHANGES

The loan usually moves to stage 3: a lifetime allowance built on expected recoveries, and interest income counted on the net amount. Under the Basel standardised approach, the unsecured part of a defaulted exposure is risk-weighted at 150% where specific provisions are below 20% of the loan and at 100% where they are at or above it, though national rules differ. The file normally passes to recovery specialists, and the balance joins the ratio analysts read first.

The borrower's contract does not change. The classification is the bank's own record and is not, of itself, an event of default. The bank's rights still come from the facility agreement.

// 03 — THE EXAMPLE

A sauce and condiments maker, constructed for this page like every figure in it, owes its bank a US$2.2m term loan and US$240,000 on an overdraft, and the bank has issued a US$60,000 guarantee on its behalf. Every payment is current and the overdraft is inside its limit. Then a supermarket group taking 40% of its volume moves to a rival.

Cash for debt service, before the loss 520,000 ÷ 430,000 = 1.21×

Cash for debt service, after the loss 190,000 ÷ 430,000 = 0.44×

Term loan 2,200,000 current

Overdraft 240,000 inside its limit

Guarantee issued 60,000 off balance sheet

Non-performing exposure 2,500,000

The bank's book Gross loans Non-performing Ratio

Before 1,200.00m 18.00m 1.50%

After (2.44m on book) 1,200.00m 20.44m 1.70%

No replacement customer is in sight, and the bank concludes it will be repaid in full only if the plant and site are sold. That conclusion is the classification, on a day when the arrears report shows nothing. What it costs depends on the security:

Security, present value after costs Shortfall Share of exposure

Case A 2,600,000 nil 0%

Case B 1,900,000 600,000 24%

In case A the loan is non-performing with little or no allowance, the combination that puzzles readers of bank accounts. In case B the same label comes with a US$600,000 charge. A real estimate would weight several recovery scenarios; one figure keeps the example plain, and the levels are the example's.

// 04 — HOW IT DIFFERS FROM DEFAULT AND IMPAIRMENT

Three vocabularies overlap. Default is the capital rules' word, credit-impaired the accounting standard's, and non-performing the supervisors' and analysts'. In Australia non-performing and default are defined as the same thing. Basel's guidelines cast wider, sweeping in anything defaulted, anything credit-impaired, and anything else that is material and more than 90 days past due or unlikely to be repaid. A loan on the watch list is none of these yet. A forborne loan may or may not be. A written-off balance has left the book altogether.

DEFINED IN ONE PARAGRAPH → · PROVISION COVERAGE, WORKED → · THE IN-TRAY, ONE MINUTE →

// 05 — WHERE IT DECIDES A FILE

The hard moment is the judgement call on a loan that looks fine. A team reluctant to make it can wait for the 90 days, by which time options have narrowed; that delay is what the unlikely-to-pay test exists to prevent. Once the label is on, leaving takes evidence. Basel's guidelines require no material exposure over 90 days past due, a continuous repayment record of at least three months as set by the supervisor, and full repayment now likely. Australia requires 90 days, or six months for a restructured loan. A partial write-off or a repossession does not earn an upgrade.

PROBLEM LOANS AND WORKOUT → · UNLIKELY TO PAY →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Basel Committee on Banking Supervision, Basel Consolidated Guidelines, chapter PAP10 (Prudential treatment of problem assets) — paragraphs 10.10, 10.11, 10.14 to 10.16 and 10.20 to 10.21 — The categories of non-performing exposure, whole-exposure measurement, the bar on collateral influencing the label, the borrower basis and the upgrade criteria — sections 01, 04 and 05.
Australian Prudential Regulation Authority, Prudential Standard APS 220 Credit Risk Management (in force from 1 January 2023) — paragraphs 13(a), 89 to 91 and 95 to 96 — Defines non-performing as in default, measures the whole exposure, excludes collateral from the label and sets the reclassification tests — sections 01, 04 and 05.
Basel Committee on Banking Supervision, The Basel Framework, CRE20 — paragraph 20.106 — The 150% and 100% risk weights for the unsecured portion of a defaulted exposure under the standardised approach — section 02.

// QUESTIONS PEOPLE ASK

At what point is a loan classed as non-performing?: When it reaches 90 days past due under the local test, or earlier if the bank judges that the borrower will not pay in full unless the security is sold. Australia counts 90 days or more; the UK and New Zealand's IRB banks use more than 90 days on a material amount. The second test needs no arrears, so a borrower with every payment current can still be non-performing, for example after the loss of a major customer.
Can a non-performing loan become performing again?: Yes, on evidence. Basel's guidelines ask that no material exposure is more than 90 days overdue, that payments have been made on time for a continuous period of at least three months as the supervisor sets it, that full repayment is now likely, and that the exposure is no longer defaulted or impaired. Australia requires at least 90 days, or six months for a restructured loan. Writing off part of the debt or repossessing collateral does not qualify.
What is a high non-performing loan ratio?: There is no single line. European guidelines treat a gross ratio of 5% or more as a trigger for extra work on a bank's non-performing book, but the UK's Prudential Regulation Authority has not adopted that figure. A ratio is better read against the same bank's history, its peers with similar lending, how quickly it writes loans off, and the security behind them. A low ratio at a bank that renews weak loans freely tells a reader very little.
What happens to a non-performing loan?: The bank moves it to specialists who decide among a restructure, a refinance elsewhere, a sale of assets, enforcement of the security, or selling the loan to another investor, generally choosing whichever is expected to recover the most. A provision covers the expected shortfall in the meantime. Once the bank has no reasonable expectation of recovering a balance, that part is written off and leaves the books. Some non-performing loans do recover and return to performing.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit risk analystSets and monitors the standard the lending line works to — policy, appetite, ratings and the models underneath them.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.
Model validatorIndependently checks that the bank's models do what they claim, before anyone relies on them.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE BANK · ASSET QUALITY

A bank's problem loans rose from 1.2% to 2.0% of its book. Provisions held against them are unchanged in dollars. Profit is up.

What do you ask first?

5 MORE ON THE BANK · ASSET QUALITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHNon-performing loan (NPL) What is a non-performing loan?