Bad Loan or Bad debt Definition : Bad Loan is the amount of loan that is unlikely to be paid by the debtor / borrower. Bad Loans or NPAs can also be defined as Credit facility in which Interest or Installment of Principle remain due for a specific period of time.
Non-performing assets or bad loans can be further categorized based on the period for which the asset has remained non-performing :
- Sub-standard assets
- Doubtful Assets
- Loss assets
Banks generally write off such Bad Loans and remove from their Balance Sheet.
Write off of Bad Loans also results in downgrading the credit rating of debtor and the borrower is unlikely to get any loan in his entire life.
Bad loans can not be avoided in a bank, as banks provide credit for a large variety of customers and usually banks keep a provision for bad loans as a percentage of their outstanding loan amount based on their experience.