A non-performing loan (NPL) is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. Non-performing loans represent a major challenge for the banking sector, as they reduce profitability. They are often claimed to prevent banks from lending more to businesses and consumers, which in turn slows economic growth, although this theory is disputed. In the European Union, the management of the NPLs resulting of the global financial crisis of 2008 has become a politically sensitive topic, culminating in 2017 with the decision by the Council to task the European Commission to launch an action plan to tackle NPLs. The action plan supports the fostering of a secondary market for NPLs and the creation of Asset Management Companies (aka bad banks). In December 2020, this action plan was revised in the wake of the COVID-19 pandemic crisis. Definition Non-performing loans are generally recognised as per the following criteria: Payments of interest and principal are past due by 90 days or more At least 90 days of interest payments have been capitalized, refinanced or delayed by agreement Payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full. Challenges and difficulties of resolving NPLs In general, the management of NPLs is made difficult due to a variety of reasons: Lack of a standard, accepted definition of NPLs, and no strong reporting frameworks Lack of any standard valuation methodology whereby financial institutions can provision for losses arising from NPL resolution. Incentives for banks and financial institutions to understate their NPLs in order to avoid reputational risk of facing higher funding cost on financial markets Unwillingness of banks to sell NPLs because of the costs associated with such an exercise, which could add to the NPL losses. This in turn could hurt their capital adequacy. Consumer protection regulations Policy response and NPL management models There are two main approaches for dealing with NPLs: A decentralized approach involves regulating banks so they take measures to prevent and resolve the NPLs in their loan books, for example by legislating accounting rules for forcing banks to provision against future losses, or by setting up legislative frameworks and other measures to foster a secondary market for NPLs. In this approach, banks are left alone to manage their own bad loans by giving them incentives, legislative powers,