The non-performing loans (NPL) ratio shows what share of a lender’s loan book is not being repaid as agreed. Supervisors, investors and NPL buyers use it as a first read on asset quality: a rising ratio usually means more credit losses are on the way, and a falling one often reflects workouts, write-offs or portfolio sales.
What counts as a non-performing loan
In the EU, a loan is non-performing when the borrower is more than 90 days past due on a material amount, or when the bank judges the borrower unlikely to pay in full without selling collateral, whatever the number of days past due (Article 47a, Capital Requirements Regulation, as amended by Regulation (EU) 2019/630). The “unlikely to pay” test means a loan can be non-performing even when payments are up to date.
NPL ratio formula
NPL ratio = gross non-performing loans ÷ gross total loans × 100
Both figures are gross carrying amounts, before provisions are deducted. This is the definition the European Banking Authority uses: the gross carrying amount of non-performing loans and advances divided by the gross carrying amount of all loans and advances (EBA/GL/2018/06).
Worked example
The figures below are illustrative, not data for any real bank.
| € million | |
|---|---|
| Gross loans and advances | 40,000 |
| of which non-performing | 1,200 |
| NPL ratio | 1,200 ÷ 40,000 × 100 = 3.0% |
If the bank sells a €400 million NPL portfolio and the rest of the book is unchanged, the ratio falls to 800 ÷ 39,600 × 100 = 2.0%. Portfolio sales cut both the numerator and the denominator, which is why they move the ratio quickly.
What is a good NPL ratio?
There is no single “good” figure, because it depends on the market, the loan mix and the point in the credit cycle. Two reference points are useful in Europe:
- The EU 5% threshold. EBA guidelines require banks with a gross NPL ratio of 5% or more to adopt a formal NPE reduction strategy with time-bound targets. The EBA stresses that 5% is a supervisory trigger, not an optimal level or an automatic target (EBA/GL/2018/06).
- The euro area average. For the 108 significant institutions supervised by the ECB, the NPL ratio was 2.17% in the second quarter of 2026, excluding cash balances at central banks (1.89% including them) (ECB Supervisory Banking Statistics, Q2 2026).
Read the ratio alongside its trend and the coverage ratio. A 4% ratio that is falling with high coverage tells a different story from a 3% ratio that is rising with thin provisions.
NPL ratio vs coverage ratio
The coverage ratio shows how much of the NPL stock is already provisioned: accumulated impairments on non-performing loans divided by gross non-performing loans. A higher coverage ratio means more of the expected loss has already passed through the income statement, which matters to investors pricing an NPL portfolio sale.
Why the NPL ratio matters to buyers and investors
- Supervisors use it to decide which banks need an NPE strategy and closer monitoring.
- Banks track it against their own reduction targets and use portfolio sales and securitisations to meet them.
- NPL investors and servicers use it to spot where supply is likely to come from, market by market.
For how lenders turn a high ratio into a portfolio sale, see our guide to NPL portfolios and the types of NPLs. For regional context, read our analysis of NPL and distressed debt markets in the UK and Ireland.
Frequently asked questions
Is the NPL ratio calculated gross or net? The standard EU measure is gross: non-performing loans and total loans are both taken before provisions.
What is the 90-day rule? A loan more than 90 days past due on a material amount is non-performing under EU rules. A loan can also be non-performing earlier if the borrower is unlikely to pay.
What NPL ratio triggers supervisory action in the EU? Under EBA guidelines, a gross NPL ratio of 5% or more requires a formal NPE strategy. National supervisors can apply this differently.
Discuss NPL markets with the lenders, investors and servicers active in Europe at Private Credit Days Europe, 18–19 November 2026, London. Request the agenda.
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