Non-Performing Loans Explained: Definition, Types and How Banks Resolve Them

A non-performing loan (NPL) is a loan the borrower is no longer repaying as agreed, or is unlikely to repay in full. How banks identify, provision and resolve these loans affects their capital, their ability to lend and the supply of loan portfolios that investors and servicers buy. This guide explains the EU definition, the main types of NPL and the ways banks deal with them.

What is a non-performing loan?

Under EU rules, a loan is non-performing when either of two tests is met (Article 47a, Capital Requirements Regulation, as amended by Regulation (EU) 2019/630):

• Past due: the borrower is more than 90 days past due on a material amount.
• Unlikely to pay: the bank judges that the borrower is unlikely to pay in full without the bank selling collateral, whatever the number of days past due.

The second test matters in practice. A loan can be classed as non-performing while payments are still being made, for example when a corporate borrower has lost its main customer or is in insolvency proceedings.

NPL, NPE and forborne exposures

These terms are often used interchangeably, but they are not the same:

• Non-performing exposure (NPE) is the wider regulatory term. It covers loans, debt securities and some off-balance-sheet items, such as loan commitments and financial guarantees given.
• Non-performing loan (NPL) usually refers to the loans and advances within that wider category, and is the term most market participants use.
• Forborne exposure is a loan where the bank has granted a concession because the borrower is in, or close to, financial difficulty. That concession may be a change to the loan terms or a refinancing that would not otherwise have been granted (Article 47b, Capital Requirements Regulation). A forborne loan can be performing or non-performing.

The EBA first harmonised the reporting definitions of non-performing and forborne exposures in its implementing technical standards on supervisory reporting, so that banks across the EU report problem loans on the same basis.

Types of non-performing loans

NPL portfolios are usually described along a few lines, because each line changes how a loan is worked out and how a buyer prices it:

Some older and national classification systems also grade problem loans as substandard, doubtful or loss, according to how much of the loan is expected to be recovered. In the EU, the harmonised supervisory measure is the single non-performing category, with forbearance flagged separately.

Why NPLs rise

NPLs tend to build up when several pressures meet:

• Economic downturns that reduce borrower income and company revenues.
• Higher interest rates, which raise repayment costs on floating-rate loans and refinancing costs on maturing debt.
• Sector concentration, for example heavy exposure to commercial real estate or to an industry under structural pressure.
• Weak underwriting during a credit boom, which tends to show up in arrears a few years later.
• Slow legal enforcement, which keeps defaulted loans on balance sheets for longer.

How banks resolve non-performing loans

Banks usually combine several approaches, choosing by segment:

1. Internal workout. For viable borrowers, the bank restructures the loan: it may extend maturity, reschedule payments or reduce the interest rate. For larger corporate cases, workout teams may also negotiate operational changes. See our guide to NPL workouts.
2. Collateral enforcement. Where restructuring is not viable, the bank enforces security through the courts or out-of-court procedures.
3. Portfolio sales. The bank sells a pool of loans to an investor at a discount to face value, usually through a competitive process. Under the EU Credit Servicers and Credit Purchasers Directive (Directive (EU) 2021/2167), applied from 30 December 2023, firms servicing NPLs bought from EU banks on a buyer’s behalf need authorisation, and borrowers keep their protections after a sale. See NPL sales.
4. Securitisation. The bank transfers a portfolio to a vehicle that issues notes to investors, sometimes keeping the senior notes. See NPL securitisation.
5. Asset management companies. Some countries have set up dedicated vehicles to take problem loans from several banks at once, such as NAMA in Ireland and Sareb in Spain.

Two rules push banks to act rather than hold NPLs indefinitely. The first is the NPL prudential backstop (Article 47c, Capital Requirements Regulation). For loans originated from 26 April 2019, it sets minimum loss coverage that rises the longer a loan stays non-performing, and any shortfall is deducted from capital. The second is the EBA requirement for banks with a gross NPL ratio of 5% or more to adopt a formal reduction strategy (EBA/GL/2018/06).

The NPL ratio in brief

The NPL ratio is gross non-performing loans divided by gross total loans. For the 108 significant institutions supervised by the ECB, it was 2.17% in the second quarter of 2026, excluding cash balances at central banks (ECB Supervisory Banking Statistics, Q2 2026). The EBA describes 5% as a supervisory trigger, not an optimal level or a target. For the formula, a worked example and benchmarks, see our full guide to the NPL ratio.

Frequently asked questions

What is considered a non-performing loan? In the EU, a loan more than 90 days past due on a material amount, or one the bank considers unlikely to be repaid in full without selling collateral.

What is a good NPL ratio for banks? There is no single figure. The EBA’s 5% threshold triggers a formal reduction strategy, and the ECB publishes the average for significant institutions each quarter. Our NPL ratio guide explains how to read it.

What are the main types of non-performing loans? They are usually grouped by borrower (corporate, SME, mortgage, consumer), by collateral (secured or unsecured), by status (unlikely to pay, past due, in enforcement) and by whether they have been forborne. Read more on the types of NPLs.

How do banks get rid of non-performing loans? Through internal workout and restructuring, collateral enforcement, portfolio sales, securitisation and, in some countries, transfers to asset management companies. See also what an NPL portfolio is.

Meet the banks, investors and servicers active in European NPL markets at Private Credit Days Europe, 18–19 November 2026, London. See who is attending.

Sources

1. Regulation (EU) 2019/630 amending the Capital Requirements Regulation, Articles 47a, 47b and 47c
2. European Banking Authority, Implementing Technical Standard on Supervisory Reporting (Forbearance and non-performing exposures)
3. European Banking Authority, Guidelines on management of non-performing and forborne exposures (EBA/GL/2018/06)
4. Directive (EU) 2021/2167 on credit servicers and credit purchasers
5. ECB Banking Supervision, Supervisory Banking Statistics for significant institutions, Second quarter 2026