Non-Performing Loan: Definition, Causes, and How to Overcome

Admin BFI
15 February 2022
Non-Performing Loan: Definition, Causes, and How to Overcome

A non-Performing Loan is a condition where debtors, both individuals and business entities, are unable to pay their installments or debts to the lender on time. This condition can be caused by many things, such as the debtor losing his main income, being absent in a planned manner in making payments, and others. If the Non-Performing Loan condition is not resolved immediately, it will worsen the debtor's credit history or score. A bad credit history, it will have an impact when the debtor will apply for financing elsewhere. Debtors with a poor credit history will find it difficult to get approval for financing applications.

For financial institutions such as financing companies and banks, Non-Performing Loan will also have a negative effect on company performance. If the NPL percentage is not maintained and is outside the recommended limit, it will have an effect on the company's reputation when it will make funding to external parties and increase the Allowance for Allowances for Receivables.

Well, from some of these negative effects, let's find out what actually causes it, illustrations, and how to deal with Non-Performing Loan. Everything will be explained in detail by the BFI Finance team in the following article.


1. Classification of Credit Smoothness

Before discussing the causes of the occurrence and illustrations of bad loans, we first find out about the classification of smoothness or collectability of a credit. Based on POJK No. 35 of 2018 Article 92, the smoothness or collectability of credit can be divided into 5 classifications, namely:

a. Current Classification

Debtors pay installments including principal and/or interest payments on time, not more than 10 calendar days.

b. Classification In Special Attention

Debtors whose installments include payment of principal and/or interest, experience late payments of more than 10 days but not more than 90 days.

c. Substandard Classification

Debtors whose installments include payment of principal and/or interest, experience late payments of more than 90 days but not more than 120 days.

d. Doubtful Classification

Debtors whose installments include payment of principal and/or interest, experience delays in payment of more than 120 days but not more than 180 days.

e. Loss Classification

Debtors whose installments include payment of principal and/or interest, experience delays in payment of more than 180 days.


If the debtor is late in paying the installments more than the specified deadline, a fine will be charged, the amount of which depends on the policies of each Financial Institution.


2. Causes of Non-Performing Loan

a. Poor Financial Planning by Debtors

Prior to approval, the Financial Institution conducts credit application eligibility including debt service ratio analysis which is used to find out how much debt the prospective debtor has compared to his income.

However, in the process after obtaining approval, sometimes debtors experience conditions that are beyond their control or are unable to manage finances properly, thus potentially causing bad loans.

Talking about financial planning, it would be nice if the debtor could analyze the need to borrow according to his ability to pay. Do not force to borrow with a ceiling that is too big, but the real need is only a percentage of the proposed ceiling. For example, you need funds of IDR 70,000,000 for home renovation costs, try to borrow only in that nominal range, not far from the required cost.

b. Debt for Consumptive Needs

Consumptive needs at this time have the meaning of borrowing to fulfill mere prestige which is not actually included in the financial priorities. Indeed, the needs of each individual are different. However, it is better to take debt or apply for a loan for productive purposes such as investment or business capital needs. Through productive debt, debtors will have the possibility of getting profits from their business activities that can be used to pay debts.


3. Illustration of Non-Performing Loan

As an illustration, here we provide an example of a case regarding the calculation of a Non-Performing Loan.

On August 1, 2021, a debtor with a BPKB Mobil guarantee experienced a 30-day late payment of installments due to difficulty paying installments due to the loss of his main livelihood. The monthly installment including the principal and interest rate that he must pay is IDR 3,500,000. The due date for monthly installment payments is the 1st. The Financing Company imposes a fine of 0.3% per day of the monthly installments if the debtor is late in paying.

From this case, in terms of credit collectability, the debtor has been classified as a Debtor in Special Mention (DPK), because he was late in paying installments of more than 10 days and not exceeding 90 days. The debtor has been subject to a fine that must be paid in the amount of IDR 315,000*.

*Payment penalty formula = (% fine x Installment per month) x number of days late

For the above cases, the fines to be paid are,

Fines paid = (0.3% x IDR 3,500,000) x 30 days = IDR 10,500 x 30 days = IDR 315,000.


In this case, if the installment is not paid immediately, the debtor will be subject to a larger fine and lead to a worse credit collectability score.


4. Impact of Non-Performing Loan

As explained above, the impact of bad loans is nothing but a negative performance for debtors. The impacts that can be caused include:

a. Difficulty in Obtaining Loans from Other Financial Institutions

Financial institutions including financing companies will always check the credit history of prospective debtors whether they are eligible to be financed or not. If the prospective debtor has credit collectability in Special Mention (DPK), it may still have the opportunity to get a loan. However, even that must be met with certain conditions. Learning from the case above, always try to pay debts on time!

From the company side, the greater the Non-Performing Loans will also affect the company's performance, you know! For financing companies or start-ups engaged in online loans, for example, an NPL of 5% is quite large. If the percentage is not maintained or even exceeds that number, the company will have difficulty in obtaining funding from creditors such as banks or other parties. Because again, creditors are less able to trust that the investment funds will be managed optimally by the debtor.

b. Higher Fines and Interest

As a form of discipline, Financial Institutions will impose fines for debtors who are late in paying installments within the specified deadline. In addition, several Financial Institutions will also charge a higher interest rate than the initial interest rate for financing applications, if there is a delay in installment payments. With these two conditions, instead of mitigating, it will increase the burden on debtors in paying debts. In nominal terms, it will be bigger and at the same time get a bad credit history.

c. Difficulty in getting a mortgage

In addition to the difficulty of getting a loan, another impact of a Non-Performing Loan is that the debtor will find it difficult to apply for a mortgage by the bank. With a relatively high mortgage nominal and a long tenor, prospective debtors with a poor credit history have a greater probability of default than those with a current credit history.


5. How to Overcome Non-Performing Loan

If you have bad credit conditions or are having trouble paying installments, don't panic! You can still negotiate it properly with the Financial Institution where you apply for credit or financing. Here are three ways that debtors can do to relax bad loans:

a. Rescheduling

The first step that debtors can take to relieve bad loans is by rescheduling or rescheduling. Rescheduling or rescheduling is a condition where the creditor grants an extension of the tenor to the debtor. The tenor length adjustment is also adjusted to the debtor's ability to pay. The longer the tenor, the hope is that it will reduce the number of installments paid each month.

For example, a debtor with an initial financing tenor of 2 years. However, the debtor experienced payment problems due to the impact of the company's salary reduction during the Covid-19 pandemic. After submitting a rescheduling to the creditor and obtaining approval, the financing tenor becomes 3 years.

b. Restructuring

The second way that Non-Performing Loan debtors can do this is by submitting re-conditions or restructuring. Requirements or restructuring is a condition in which the creditor can change the payment schedule, time period, and other requirements provided that the maximum credit limit is not changed.

c. Reconditioning

The last way is to apply for realignment or reconditioning. In this condition, creditors can provide credit relaxation by converting arrears into new credit principles, to rescheduling and reconditioning. In addition, creditors can also reduce the interest rates charged to debtors. In fact, if the debtor is deemed unable to pay his debt again after various efforts have been made, the creditor may consider not charging interest rates, so that debtors who experience bad credit will only pay the remaining principal of the debt.


Well, that's the understanding of a Non-Performing Loan. Non-Performing Loans can happen anytime and by anyone. However, this can still be anticipated by being disciplined in paying monthly installments. In addition, optimal financial planning also determines the smooth credit or loan that you are applying for!

If you need a loan for investment or business capital purposes, you can always apply for it through BFI Finance! Only by guaranteeing BPKB Cars, Motorcycles, and house certificates, you will have the opportunity to get a loan with a low-interest rate and fast approval! BFI Finance, the Solution for All Your Financial Needs!

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