Maybe you have heard of the terms Non Performing Loan (NPL) and Loan at Risk . Although often interpreted the same, namely bad credit or non- performing loans , the two things have differences. Where is the difference? Why is it important for you to understand the difference between the two?
So that the discussion about the difference between Non Performing Loans (NPL) and loan at risk can be more easily understood, it is better for IdScore friends to understand first what collectability is. In the context of credit, collectibility is the classification of the status of the payment of installments and interest on credit by the debtor.
There are five classifications of collectibility status, including:
- Smooth collectibility or Col-1
Col-1 is the highest collectibility status classified as Performing Loan (PL). This level is characterized by a history of payment of interest installments or principal installments and credit interest each month exactly or less than the due date of the monthly payment.
- Collectability in special attention or Col-2
Col-2 is usually called Special Mention (DPK) in the banking world. This collectibility status is also included in the Performing Loan (PL) category, which is characterized by a delay in paying the debtor beyond the due date up to at least 90 days from the maturity date or 3 months. In fact, debtors with DPK status are considered bad by banks. Therefore, debtors with DPK status already have the option to restructure or pay off bills that are already late in payment.
- Substandard collectability or Col-3
Col-3 is the collectibility status of debtors who are late in paying more than 90 days from the monthly due date for at least 120 days or 3-4 months. At this stage, the bank has the obligation to issue the First Warning Letter (SP) and start calculating the various existing arrears.
- Doubtful collectability or Col-4
Col-4 is an advanced status of Col-3 where the late payment of the debtor has exceeded 120 days from the due date. In this stage, the bank can settle the unpaid installments and interest by conducting a collateral auction.
- Collectability jam or Col-5
Col-5 or commonly called bad credit is the lowest collectibility status and is included in the NPL. As a continuation of the previous status, bad loans represent installments and loan interest that have not been paid for more than 180 days. At this stage, auctioning the collateral after issuing a warning letter (SP) 3 times is highly recommended for banks to prevent an increase in the level of NPL, which can have a trickle down effect on economic conditions.
After IdScore friends understand the categorization of credit collectibility, then the difference between NPL and loan at risk will be much easier to understand. Because these two terms are used to categorize loans based on the collectibility level of the debtor.
- Non Performing Loan or NPL is intended for collectibility 3 to 5
- Loan at Risk is intended for collectibility 2
Simple isn’t it? So that’s the difference between NPL and Loan at Risk . The next time you, hear this term again, don’t forget the collectibility level!