Nonperforming loans, or NPL, are loans that are no longer producing income for the bank that owns them. Loans become nonperforming when borrowers stop making payments and the loans enter default. The exact classification can vary from institution to institution, but a loan is usually considered to be nonperforming after it has been in default for three consecutive months.
Banks often report their ratio of nonperforming loans to total loans as a measure of the quality of their outstanding loans. A smaller NPL ratio indicates smaller losses for the bank, while a larger (or increasing) NPL ratio can mean larger losses for the bank as it writes off bad loans.