Have you come across the term ‘bad loan’ and wondered what they mean? Let’s read ahead to find out what bad loans mean in banking terminology.
Learn More About: RBI Guidelines for Loan Recovery Agent and Process
Bad Loans in Banking Terminology
Bad loans in banking terminology are generally known as Non-Performing Assets. Any loan repayment that has been delayed for 90 days or more is considered a bad loan. It is mentioned in the balance sheet of the bank.
Loans normally have a 90-day grace period, which means that EMI or interest payment can be delayed by a maximum of 90 days. Thus, if a payment is not made within this time frame, it is considered a non-performing asset.
Examples of Bad Loans
Bad loans can be of various types, some of which are mentioned below -
Any EMI or interest payment that has been delayed for more than 90 days
Any credit card or overdraft facility account that has been non-operational for more than 90 days
Any short-term agricultural advance whose payment is late for more than two crop or harvest seasons
Any long-term agricultural advance whose payment is late for more than one crop or harvest season
How do Banks Deal with Bad Loans?
As soon as banks recognize a loan as a bad loan, their first plan of action is to try and retrieve as much of the funds as possible. They might try to call and get the EMI to be paid. Other steps include trying to settle the loan with the borrower.
Eventually, they may also sell off the assets or collateral pledged by the borrower to retrieve the loan money.
Effect of Bad Loans on Banks and Borrowers
Bad loans affect both the bank and the borrower. As for the bank, one or two bad loans don’t have a huge impact. If too many of their loans become non-performing assets, they may face perpetual losses.
As far as the borrower is concerned, even one missed EMI payment will have an impact on their credit score. Not repaying a loan for more than 90 days will have dire implications on their credit report. This will further make it difficult for them to procure loans in the future.
Conclusion
Bad loans in banking terminology are generally known as non-performing assets and they are harmful for both the lender and the borrower. This is why banks take documents and do thorough research on a customer before approving a loan.
As a borrower, you should always pay your EMIs on time as failing to so do may impact your credit history and creditworthiness. It is a good idea to calculate your EMIs before taking a loan so that you can plan accordingly.
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FAQs
Bad loans in banking terminology are generally known as Non-Performing Assets. Any loan repayment that has been delayed for 90 days or more is considered a bad loan.
What are bad loans called? ›
Nonperforming Loan (NPL) FAQs.
What is bad debt in banking? ›
Bad debt is an amount of money that a creditor must write off if a borrower defaults on the loans. If a creditor has a bad debt on the books, it becomes uncollectible and is recorded as a charge-off.
What is the difference between a loan and a bad debt? ›
Loans like mortgages are usually considered good debt because they provide value to the borrower by helping them build wealth. However, many other kinds of debt, such as high-interest credit card debt, aren't so healthy for your finances. If you're in bad debt, you may want to seek debt relief.
What is a problematic loan? ›
Any loan that cannot quickly be recovered from borrowers is called a problem loan. When these loans can't be repaid according to the terms of the initial agreement—or in an otherwise acceptable manner—a lender will recognize these debt obligations as problem loans.
What is a bad loan in banking terms? ›
Bad Loans Meaning
Loans from a bank that have not paid interest for more than 90 days are known as Bad Loans or Non – Performing Assets (NPAs). In other terms, a loan is considered a non-performing asset (NPA) if the bank ceases receiving payments on the principal and interest for more than three months.
What is an example of a bad loan? ›
Examples of good debt include mortgages that provide a home and a valuable asset and student loans that provide job skills. Examples of bad debt include unchecked credit card debt and payday loans.
What is bad debt terminology? ›
Bad debt is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid.
How do banks recover bad loans? ›
The lender may recover the receivable as a partial payment or as equity. Bad debt recovery can also come by selling off the borrower's collateral. For example, a borrower takes a car loan but fails to pay it back in time. In such a situation, the lender can repossess the car, sell it off and recover the loan.
What is another name for bad debt in accounting? ›
In finance, bad debt, occasionally called uncollectible accounts expense, is a monetary amount owed to a creditor that is unlikely to be paid and for which the creditor is not willing to take action to collect for various reasons, often due to the debtor not having the money to pay, for example due to a company going ...
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
Are car loans bad debt? ›
A car may lose 20 percent of its value in the first year. If you have a high interest rate, you could owe more than your car is worth — what's called being upside-down on your loan. Being upside-down on a car loan is a bad situation.
What debt should you avoid? ›
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.
What is the criteria for a bad loan? ›
Bad loans in banking terminology are generally known as Non-Performing Assets. Any loan repayment that has been delayed for 90 days or more is considered a bad loan. It is mentioned in the balance sheet of the bank.
How do banks deal with bad loans? ›
To assume a more attractive position and reduce its tax liability, banks often write off toxic loans, the most common form of bad debt for a bank. When a bad debt is written down, part of the debt is recovered and part is written off, usually as part of a settlement.
What is a toxic loan? ›
Toxic debt refers to debts that are unlikely to be paid back in part or in full, and therefore are at high risk of default. These loans are toxic to the lender since chances for recovery of funds are small and will likely have to be written off as a loss.
What is bad debt also called as? ›
In finance, bad debt, occasionally called uncollectible accounts expense, is a monetary amount owed to a creditor that is unlikely to be paid and for which the creditor is not willing to take action to collect for various reasons, often due to the debtor not having the money to pay, for example due to a company going ...
What are predatory loans called? ›
Payday loans are typically predatory in nature. Payday loans are short-term, high-interest loans, usually for small amounts ($500 or less), that are due your next pay day.
