Nonperforming loan: Meaning and explanation
How do you define a bad loan.
When a consumer needs to take out a loan, he undertakes at the same time to repay the amount of money loaned to him by the credit institution or by the financial institution. In other words, it will have to refund the amount (plus a fixed or variable interest rate), by paying the installments in pre-established deadlines.
However, it can happen for various reasons (economic difficulty, personal and family problems, loss of job, etc.) that the consumer is unable to repay the loan according to the agreed methods and that the loan is classified by the bank as a ” loan. in suffering “. This definition therefore means a loan that is difficult (or almost impossible) to be collected by the credit institution due to the debtor’s insolvency.
But is a single unpaid installment enough for a loan to be defined as bad debts? Obviously not. In order for the credit institution to categorize a loan as bad, certain situations must have occurred previously, as we will try to illustrate in the next paragraph. The consequences of the debtor in the case of bad loans will also be briefly presented below.
How can you get to a bad loan.
In the event that a debtor is unable to pay one or more installments of the loan (or begins to pay late), he will be contacted by the bank or finance company to investigate the reasons for the non-payment. If it emerges that the consumer is in a momentary situation of economic unavailability, a term will be agreed (usually between 10 and 14 months) in which the debtor will have to regularize the situation (then pay the arrears installments and resume carrying out the subsequent payments on time). In this case we speak of “bank watchlist”, or as emerges from the term, a temporary situation of illiquidity but which could still be resolved in medium-short times.
If, however, the consumer is unable to settle payments on schedule, the lender can classify the loan as one of bad loans. In order to arrive at this stage, therefore, a proven situation of insolvency on the part of the consumer is necessary, who is probably unable to return the money lent to him. The main difference between substandard and non-performing is in fact found with regard to the persistence of the debtor’s default. While in the case of substandard the situation is serious but it could still be temporary and reversible, when the debtor’s condition of insolvency is passed on it is assessed as permanent by the credit institution.
Consequences for the debtor deriving from having a bad loan.
If a bank or a financial company catalogs a credit as bad debts, they must send the debtor written communication by registered mail, where it is required to return all the sums lent within a maximum time of 15 days. If this does not happen, the credit institution can proceed with an injunction, that is, it will attempt to recover the money through legal channels. In addition, the debtor’s situation will be reported to the Central Credit Register (a system that contains information on customer debt, which can be consulted by all intermediaries). The report effectively prevents the consumer from being able to ask for credit from other banks or financial institutions, as it is a “bad payer”.
Clearly, once the debt has been fully paid, the cancellation of the bad position from the Central Credit Register will be possible.
It is important to underline that if a debtor believes that the bank or the financial company has cataloged his loan among the bad loans too quickly (not having given him the opportunity to remedy what was only a situation of momentary illiquidity), he can appeal to the court and a judge will decide on that.