Nonaccrual Loan

Asset, usually a loan, that is not earning the contractual rate of interest in the loan agreement, due to financial difficulties of the borrower. Nonaccrual assets are loans in which interest accruals have been suspended because full collection of principal is in doubt, or interest payments have not been made for a sustained period of time. A reserve for possible loan losses is set aside for these loans, and any payments received from the borrower are applied first to principal, and then to loan interest due. According to the guidelines of banking regulators, a loan with principal and interest unpaid for at least 90 days is considered a nonaccrual loan, unless the lender has adequate collateral. Consumer loans and residential mortgage loans are generally exempted from these guidelines. For bank bookkeeping purposes, a nonaccrual loan is recorded as a Cash Basis Loan, that is, a loan in which interest is credited as earned income only when payments are collected from the borrower. See also Nonperforming Asset; Real Estate Owned; Renegotiated Loan; Workout Agreement.

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A nonperforming loan that is not generating the stated interest rate because of nonpayment from the borrower, typically due to financial difficulties. Nonaccrual loans are more likely to default, meaning that the investor will not recoup his or her principal.

Standard banking regulation requires that nonperforming loans be classified as nonaccrual if principal and interest have not been paid for at least 90 days, except in cases where the lender has adequate collateral to cover the loan.

Investopedia Says:
Banks and lending institutions maintain reserves to cover nonaccrual-loan losses. When borrowers resume making payments on the loan, the cash is applied first to principal and then to interest.

For bookkeeping purposes, banks deem nonaccrual loans as “cash basis loans.” These loans can have interest credited only when the borrower makes payment; the bank can no longer credit the interest to its revenue until actual receipt. Interest is then recorded as earned income.

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