What Is a Non-Performing Loan Ratio?

A loan does not become non-performing simply because a payment is one day late. Regulators use arrears categories and provisioning rules to show when repayment problems have become serious enough to threaten the loan’s value.

The basic calculation

The ratio is non-performing loans divided by gross loans, multiplied by 100. If KES 500 million of a KES 5 billion portfolio is non-performing, the ratio is 10%.

How arrears are classified

The regulations classify loans according to repayment performance and the period in arrears. As risk increases, the SACCO must recognise a higher allowance for possible loss. The exact categories and percentages depend on the applicable DT or NWDT rules.

Why provisions hurt surplus

When a SACCO sets aside money for doubtful loans, the provision appears as an expense. That reduces surplus available for reserves and member distributions. Recovering the loan later may improve the position, but the SACCO cannot simply ignore the risk.

Why liquidity also suffers

Expected repayments fund new loans and withdrawals. When borrowers stop paying, cash inflows fall. The SACCO may then delay disbursements or rely more heavily on deposits and external borrowing.

What a member should compare

Look at the ratio over several years, the provision coverage, write-offs and recovery strategy. Ask whether arrears are linked to one employer, product or sector. A falling ratio supported by actual recoveries is stronger than a falling ratio caused by rapid new lending that makes the denominator bigger.

Bottom line

The NPL ratio is not an accounting detail. It shows how much of the member-funded loan book is no longer behaving as planned.

Editorial note: Use the definitions and ratios in the specific SACCO’s audited report.