NPL (Non-Performing Loan) is a loan where the borrower is more than 90 days past due on a material amount, or where the lender judges full repayment unlikely without selling collateral, even if no payment has been missed. EU regulation uses the wider term non-performing exposure, covering bonds and off-balance-sheet commitments, and CRR Article 178 allows 180 days for some residential mortgages. The NPL ratio divides gross NPLs by gross loans, read alongside the provision coverage ratio. Under the CRR backstop, under-provisioned NPLs originated from 26 April 2019 are deducted from CET1 capital, which pushes banks to sell them at a discount to specialist investors served by credit servicers authorised under Directive (EU) 2021/2167.
How is the NPL ratio calculated
The NPL ratio divides gross non-performing loans by total gross loans. According to the EBA risk dashboard, the weighted average NPL ratio of EU/EEA banks was 1.8% in Q2 2026, unchanged from Q1. The companion figure is the coverage ratio, the share of NPLs already covered by provisions, which stood at 41.3%. A lender with a 6% NPL ratio and 25% coverage has both more bad debt and a thinner cushion against it.
The NPL backstop
Regulation (EU) 2019/630 added a prudential backstop to the CRR for loans originated on or after 26 April 2019. If a bank's provisions on a non-performing loan fall short of a rising minimum, the shortfall is deducted from CET1 capital. Coverage must reach 100% after three years for unsecured exposures, seven years for other secured exposures and nine years for exposures secured by immovable property. Holding old bad loans therefore costs capital every year, which pushes banks to sell them.
How are NPLs sold
Banks sell NPL portfolios at a discount to gross book value to specialist investors, who recover what they can through collection, restructuring or collateral sales. Directive (EU) 2021/2167, applicable from 30 December 2023, requires credit servicers that manage such loans to be authorised in their home member state, lets that authorisation be passported, and obliges non-EU purchasers of EU loans to appoint an EU representative. Servicers already active on 30 December 2023 had until 29 June 2024 to obtain authorisation.
A worked example: a portfolio with €50 million gross balance and expected recoveries of €14 million over four years might trade at around €9–10 million once the buyer discounts recoveries at its target return and deducts servicing costs. The seller books the gap against existing provisions and releases the capital the backstop would otherwise consume.
NPLs in fintech lending
For P2P lending platforms, BNPL providers and SME lenders, the equivalent metrics are 90+ days past due and charge-off rates by vintage. They depend on the probability of default assumed at underwriting and on the loss given default after recovery.
When buying a lender, due diligence rebuilds the NPL ratio from loan-level data rather than accepting the reported figure, checks whether restructured loans were reclassified as performing too early, and prices the book on expected losses, often through a holdback or deferred consideration tied to actual recoveries.