What characterizes a 'non-performing loan'?

A non-performing loan is fundamentally characterized by its status of being in default or close to default. This means that the borrower has failed to make scheduled payments of principal and interest for a specified period, typically 90 days or more. Such loans pose a significant risk to lenders, as the chances of full repayment diminish over time, impacting the lender’s financial health and balance sheet.

The implications of a loan being categorized as non-performing are critical for financial institutions, as they need to manage risk and establish provisions for potential losses. Banks monitor these loans closely, as high levels of non-performing loans can indicate broader issues in lending practices or economic conditions.

In comparison, loans that are consistently paid on time are not at all similar to non-performing loans, as they represent successfully managed debt. A loan with a reduced interest rate does not inherently affect its performance status, and the same goes for loans secured by collateral, which could still be performing or non-performing depending on the borrower's repayment behavior. Thus, the specific identification of a loan in default or near default distinctly defines a non-performing loan.