Banks lend out money with the hope that whoever is borrowing it is going to pay it back. However, that doesn’t always happen and borrowers are sometime unable to pay the money back.
What that happens, you get the formation of non-performing loans (or NPL or short), which is exactly what it sounds like.
NPLs are formed when principal and interest payments are overdue by a certain number of days – and are considered bad debt because the likelihood of getting paid back on that debt decreases.
Secured vs Un-secured
Loans are typically secured or unsecured. Unsecured loans typically charge higher interest rates because in the event of a default, the bank has no collateral to liquidate and recovery is minimal.
Secured loans typically feature better recovery rates because of the underlying collateral pledged to the bank. Interestingly, banks can also bundle these NPLs into a portfolio and sell them …